The DOL’s Rollover Guidance - The Opportunities & Challenges

At the end of 2020, the Department of Labor (DOL) adopted a rule that reinstates the five-part test to determine what is or isn’t investment advice and implements a new prohibited transaction exemption that expands fiduciary advice to include rollover recommendations. In alignment with the SEC’s Regulation Best Interest Regulation, the new DOL rule, PTE 2020-02, Improving Investment Advice for Workers & Retirees, went into effect on February 16, 2021. However, advisors have until December 20, 2021, to comply.

What Does This Mean?

The rule and its exemption give retirement advisors the opportunity to continue working with their clients (who are plan participants) through retirement and not just to retirement. However, the DOL’s new interpretation that rollover advice may constitute fiduciary investment advice compels financial services companies to reconsider how they provide rollover advice to qualified plan participants.

In fact, the new rule prohibits a fiduciary from receiving fees resulting from advising plan participants to roll over plan assets to an IRA unless an exemption applies. This exemption can be made if the financial institution and investment professional involved provide investment advice that satisfies the DOL’s Impartial Conduct Standards, including:

• A best interest standard
• A reasonable compensation standard
• A requirement to make no materially misleading statements

The rollover advice rationale and that the advice given was in the participant’s best interest must be documented and provided to the participant. This rollover advice must also be part of an ongoing relationship or at the beginning of an ongoing relationship that an individual has with a financial advisor.

Why This Is Important

The Significant Rollover Opportunity

According to the Investment Company Institute, the mutual fund industry trade organization, rollovers from employer-sponsored retirement plans have fueled the growth in IRAs. As of mid-2020, six in 10 traditional IRA–owning households indicated that their IRAs contained rollovers from employer-sponsored retirement plans. Among households with rollovers in their traditional IRAs, 81% indicated that they had rolled over the entire retirement account balance in their most recent rollover.

Documentation & Disclosure Is Key

Rollover considerations can be complex. From investment options, fees, clients’ liquidity needs, and participants’ current and future financial situations, there are many factors to consider. While some firms have implemented a rollover suitability questionnaire to ensure they cover all these issues with participants, all advisors need to document in writing the rationale behind the rollover recommendations they are making. Having an organized rollover approach is key.

For example, investment professionals should evaluate whether the assets should be left in an employer sponsored plan (if permitted) when considering fees, investment options and the level of service that will be available. Once this evaluation has taken place, proper documentation is required to state why the rollover recommendation is in the individual’s best interest.

Innovative Rollover Solutions

Yannis Koumantaros, CFO of ABG member Spectrum Pension Consultants and co-founder of an innovative fintech IRA company, GROUPIRA, sees robust demand for his fintech firm’s rollover IRA program from both plan sponsor clients and financial advisor partners.

“Rollovers are now the biggest trend we are seeing among the clients we serve. This comprehensive rollover program is a proactive way to help our plan sponsor clients cut costs and our advisor partners grow their business,” he said.

Providing innovative and practical solutions like this is an important priority for ABG member firms across the country.  Whether you are a plan sponsor or a financial advisor working with plan sponsors, consider ABG Southwest your resource as we move forward in 2021. Contact your local ABG Southwest representative to learn more. Or Contact Us.