Plan sponsors understand the importance of retirement savings to their employees. To that end, plan sponsors want to engage investment professionals at the plan level and make them available to plan participants for assistance. Historically, ERISA has had significant limitations and prohibitions on fiduciaries providing investment advice. Prohibited Transaction Exemption (PTE) 2020-02 outlines a framework to provide relief to entities and individuals that provide investment advice, allowing plan sponsors to use these professionals with less concern about an inadvertent prohibited transaction.
PTE 2020-02, adopted by the Department of Labor (DOL), focuses on promoting investment advice that’s in the best interest of retirement account holders, mitigating conflicts of interest and ensuring that those providing investment advice to retirement account holders (investment advice fiduciaries) do so in a prudent and in an undivided loyal manner, while still allowing common forms of compensation.
Background of PTE 2020-02
Historically, the prohibited transaction rules generally:
- Prohibit fiduciaries that provide investment advice to plans subject to Title I of ERISA, including 401(k) plans, pension plans, and profit-sharing plans, and IRAs (collectively, “plans”) from receiving compensation paid by third parties or that varies based on the fiduciaries’ advice.
- Prohibit fiduciaries from engaging in principal transactions, including purchases and sales, with plans on behalf of their own accounts.
The long-standing DOL definition used to determine whether an individual is considered to be providing investment advice, with respect to a retirement account, is met when a person:
- “Render[s] advice to a plan, plan fiduciary, or IRA owner as to the value of securities or other property, or make[s] recommendations as to the advisability of investing in, purchasing, or selling securities or other property,
- On a regular basis,
- Pursuant to a mutual agreement, arrangement, or understanding with the plan, plan fiduciary, or IRA owner, that
- the advice will serve as a primary basis for investment decisions with respect to plan or IRA assets, and that
- The advice will be individualize based on the particular needs of the plan or IRA.”
PTE 2020-02 allows registered investment advisors, broker-dealers, banks, and insurance companies (collectively, “financial institutions”) and their employees, agents, and representatives (collectively, “investment professionals”) “who provide fiduciary investment advice to retirement investors to receive otherwise prohibited compensation and engage in riskless principal transactions and other principal transactions.”
Summary of PTE 2020-02
PTE 2020-02 contains a broad protective framework to individuals providing investment advice, provided certain conditions are met with respect to all of the below:
- Impartial conduct standards, including the requirement that investment advice be in the best interest of the investor.
- Disclosure requirements, including a written acknowledgment of fiduciary status.
- An obligation to establish and maintain policies and procedures that are prudently designed to ensure compliance with the impartial conduct standards and mitigate conflicts of interest.
- At least annual retrospective compliance reviews.
PTE 2020-02 also specifies when financial institutions and investment professionals will no longer be eligible to rely on its terms (e.g., for 10 years after certain criminal convictions).
A summary of the PTE is as follows:
- Financial institutions must maintain records for six years demonstrating compliance with the exemption, and the records must be available to the DOL and Department of the Treasury.
- Prior to engaging in a rollover transaction, the investment professional providing advice is required to provide documentation for the specific reasons why rollover advice is in the best interest of the retirement investor receiving the advice.
- The financial institution has to conduct an annual retrospective review that’s reasonably designed to assist in detecting and preventing violations and achieving compliance with the impartial conduct standards, as well as the policies and procedures governing compliance with the final exemption. The methodology and results of the retrospective review have to be conveyed in a written report that’s provided to a senior executive officer, as defined in the exemption.
- The PTE allows for self-correction of violations of its conditions if the following conditions are met:
- The violation didn’t result in investment losses or the investor was made whole.
- The violation is corrected, and the DOL is notified of the violation and correction within 30 days after the correction.
- The correction occurs no later than 90 days after the financial institution knew or reasonably should have known of the violation.
- The violation and correction are disclosed in a timely manner and described in the Financial Institution’s retrospective review.
- The preamble to PTE 2020-02 explains that previous DOL guidance was incorrect regarding rollover advice when it stated that advice to take a distribution from an ERISA-covered plan isn’t advice with respect to plan assets. Such guidance now is considered advice with respect to plan assets, but it won’t be considered fiduciary advice unless it’s provided by a person who satisfies all the requirements of the five-part test for fiduciary investment advice. Furthermore, the preamble explains that the DOL will not pursue claims for breach of fiduciary duty or prohibited transaction violations based on rollover recommendations for the period between 2005 and Feb. 16, 2021.
The PTE became effective on Feb. 16, 2021, but the DOL has adopted a temporary nonenforcement policy with respect to advice previously provided in line with Field Assistance Bulletin 2018-02, which will remain in place until Dec. 20, 2021.
For more information, the DOL expanded on PTE 2020-02 in a Frequently Asked Questions (FAQs) along with a consumer-focused guide to help retirement investors better understand their rights and the role of investment advisors.
Conclusion
With PTE 2020-02, as long as the guidelines are followed, plan sponsors now can use investment professionals at both the plan level (investment options) and for participants (investment strategies) without fear of a reportable prohibited transaction. Plan sponsors should coordinate with individuals engaged to provide investment advice to the plan or plan participants to ensure processes are in place to confirm the requirements of PTE 2020-02 are being met.
If you have further questions about PTE 2020-02 and what it might mean for you, please contact your employee benefits experts.
