New Retirement Account Rollover Rules

New Retirement Account Rollover Rules

November 14, 2022

Alliance Benefit Group Southwest

This article originally appeared on ABGSW.com. Alliance Benefit Group Southwest is a subsidiary of REDW LLC and acts as the firm’s trusted group of retirement plan advisors.


What You Need to Know 

On December 18, 2020, the Department of Labor (DOL) adopted a new prohibited transaction exemption under ERISA and the Internal Revenue Code for investment fiduciaries with respect to employee benefit plans and individual retirement accounts (IRAs) called Prohibited Transaction Exemption (PTE) 2020-02, Improving Investment Advice for Workers & Retirees.  

On July 1, 2022, the final requirements of PTE 2020-02 became fully effective. Advisors who provide investment advice relying on this exemption must now document rollover advice and explain to a plan participant why the rollover is in their best interest in order to receive compensation that would otherwise be prohibited in the absence of an exemption.1  

This new rule sets a higher fiduciary standard for retirement plan rollovers. Advisors now have the responsibility to gather necessary data about the retirement plan, IRA, and plan participant to determine that a rollover recommendation is in a participant’s best interest. There must be written documentation to support the recommendation before any rollover can take place, conflicts of interest must be disclosed, and compensation received by an advisor must be deemed “reasonable.”


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WHAT NEEDS TO BE DOCUMENTED? 

The DOL stated that to make a rollover recommendation from an employer retirement plan into an IRA, certain factors would need to be documented. A few of these relevant factors include: 

  • Alternatives to a rollover, including leaving the money in the investor’s employer’s plan, if permitted 
  • Fees and expenses associated with both the plan and the IRA 
  • Whether the employer pays for some or all of the plan’s administrative expenses 
  • Different levels of services and investments available under the plan and the IRA 

When making a rollover recommendation from another IRA or from a commission-based account to a fee-based arrangement, the analysis and subsequent documentation should include but is not limited to: 

  • The long-term impact of any increased costs 
  • Why the rollover is appropriate 
  • The impact of investment features (e.g., surrender schedules) 

Before engaging in any transaction, an investment advisor must provide a plan participant with a written description of the advisor’s and firm’s material conflicts of interest arising from services that include a rollover recommendation. The disclosure needs to be accurate and not misleading so that participants can make informed decisions. 

EDUCATION OR ADVICE? 

If advisors find they are overwhelmed by the new requirements, there is one solution – provide education regarding rollovers. An advisor can present a participant with the pros and cons of each option (e.g., leave the money in the plan vs. rollover the assets to an IRA). If there is no explicit recommendation and the information is not biased, this will not be regarded as fiduciary advice and an exemption will not be needed.  

PLAN SPONSOR RESPONSIBILITIES 

While the PTE 2020-02 did not specifically assign new compliance requirements to plan sponsors, there is still a fiduciary responsibility for sponsors to monitor and evaluate any service provider hired to provide participants with investment advice. Plan sponsors need to ensure that these service providers are compliant with the new rules.  

If you have questions regarding the new rollover rules and how they may impact your plan, your trusted ABG Southwest advisor is available to help. Contact ABG Southwest» 


[1] U.S. Department of Labor, Employee Benefits Security Administration 

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