Big changes to retirement plan and IRA rollover rules will happen this Friday, July 1st. Yet too many advisors are unwilling or unable to take Prohibited Transaction Exemption 2020-02 (PTE 2020-02) seriously, and it’s a problem, says ERISA expert and Faegre Drinker Partner Fred Reish.
It’s not necessarily the large financial institutions that worry him—the known broker-dealers and RIA firms; they have lawyers and resources to address the issue. Rather, it’s the downstream players in the smaller and mid-market he believes are not fully compliant, not only with Friday’s enforcement deadline but the previous February implementation deadline.
While the rule went into effect in February, the PTE language says an advisor must provide an IRA owner or plan participant with a written explanation of why they recommended a rollover. That deadline will hit this week.
“The explanation must contain the specific reasons why the rollover is in that individual investor’s best interest right now,” Reish emphasized. “People are having a hard time grasping that. Even worse, I’m afraid they may not even be working on the July issue at all.”
To make matters worse, the February date required that numerous disclosures be made and policies/procedures put in place.
“For example, a rollover recommendation has to be disclosed as a conflict of interest,” he explained. “If you recommend that someone transfers an IRA to you, and they do, it’s a conflict and must be disclosed. Otherwise, you must acknowledge that you’re a fiduciary under the Internal Revenue Code (IRC).”
If the advisor doesn’t satisfy these conditions, the exemption is disallowed and means the advisor that recommended the IRA transfer, or the retirement plan rollover committed a prohibited transaction.
They must then make the client whole or return them to (essentially) the same position as if they were still in the plan, yet they can’t roll the money back into the plan.
Aggressive adherence
How aggressively will the DOL enforce the July 1st deadline? It said that between January 1, 2023, and June 30, 2023, advisors must retrospectively review compliance for this year.
“You must reduce that to writing, and a senior officer of the firm has to sign off on it,” Reish said.
If the department sees it and then “audits your audit,” and any mistakes are disclosed, they will force the advisor to correct it—no good faith compliance, no substantial effort, nothing.
“If you don’t disclose that you discovered some mistakes, they could go so far as to say every one of your rollover recommendations was a prohibited transaction because the annual retrospective review is one of the conditions to get the exemptions,” he concluded. “So, that retrospective review is a trap door you can fall through without realizing it.”
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
Is the “written explanation of why they recommended a rollover” beginning with the advice on rollovers beginning 7/1/22 or retroactive? For example, if an adviser has been working with a client on rolling over plan assets to a rollover IRA and the rollover will happen AFTER 7/1/22, will the adviser need to go back and complete our form (written explanation)? OR If a rollover occurred prior to the deadline but in 2022, do we need to go back and document with the client to CONTINUE to receive payment based on the exemption? Thanks!
We put the question to Fred Reish. This was his answer:
Its a good question, but there’s not a good answer. Here’s what PTE 2020-02 requires: Prior to engaging in a rollover recommended pursuant to the exemption, the Financial Institution provides the documentation of specific reasons for the rollover recommendation, required by Section II(c)(3), to the Retirement Investor.
So, it appears that the “specific reasons” requirement applies up to the time of “engaging” in the recommended rollover, and not necessarily at the time of the recommendation. I think that the only “safe” answer is that the specific reasons should be provided if the plan makes the distribution on or after July 1. It shouldn’t be that big a deal. An adviser would need to have specific reasons to recommend the rollover in any event. The July 1 date is just about reducing those to writing and then providing that to the participant.