First things first… CLICK HERE FOR THE DOL OVERVIEW RECORDING.

Now, let’s talk about education and recommendations…

As we discussed in our last communication, “What Does It Mean To Be A Fiduciary?”, under the latest change in the Department of Labor’s (DOL) interpretation of the Employment Retirement Income Security Act of 1974 (ERISA) (which governs many retirement plans) and the Internal Revenue Code (which governs both retirement plans and individual retirement accounts and annuities, or “IRAs”), you are a fiduciary when you provide investment advice to retirement investors and meet a 5-part test.[1]  The DOL’S latest Prohibited Transaction Exemption (PTE 2020-02[2], or “Rule”), which becomes required on December 20, 2021, allows you to receive third-party compensation, such as commissions, when you make rollover recommendations to a retirement investor.  However, if you only provide the investor with education without making a recommendation, then you have not become a fiduciary, ERISA’s regulations do not apply, and using 2020-02 for a rollover transaction is not required.

So, it’s important to understand the line between what constitutes education and what constitutes a recommendation.  This communication attempts to provides examples of both, so that you can decide which path works best for you and your customers.

Education vs Recommendation
When considering the potential need for an investor to roll assets from one retirement plan to another, you may provide general information to your client without making a rollover recommendation.  For example, education can include any of the following:

• A discussion of the general characteristics of employer-sponsored plans and IRAs, which could include:
  • Expenses associated with each
  • Available investment options associated with each
  • Tax implications of each
• A discussion of the rollover options available under the existing plan.  For example:
  • Pros and cons of leaving the assets in the current plan
  • General discussion of available product types
• A discussion about historic differences in returns between asset categories
• The effects of inflation over time
• Estimates of income needs at retirement, and
• General investment concepts, including dollar cost averaging, modern portfolio theory, and asset allocation.

To stay within the realm of education, the information you provide to the retirement investor may not include a “call to action”.  A “call to action” would be an explicit or implicit recommendation that the investor take some action.  For example:

• “I recommend you roll this account into an IRA” – clearly a recommendation.
• “If it was my decision, I’d move these assets from the employer” – this is driving the investor to take action and, therefore, a recommendation.
• “I think you should…” – also a call to action.

Generally, referring to a specific product would ordinarily be done if or when a recommendation is made.  Therefore, educating an investor on expenses should not include a specific product as an illustration.  For example:

“Take XYZ fund, for example.  Its expense ratio is…and compare that to your existing plan….”.

Rather, a best practice for providing education could be to avoid naming a particular company or product in the course of discussion, even if presented for comparison purposes.  Keeping the discussion at the product-type level (for example, comparing the structure of mutual funds vs annuities, generally) precludes possibly leading the investor toward a particular product or vendor, and keeps the conversation informational.

When comparing the expenses of available product types, explaining the differences in general terms remains educational and provides the investor a general sense of the differences between products:

“Expense ratios for mutual funds are typically around X%, versus those of variable annuities, which are generally around Y%…”

Submitting Business – Rollover Education Forms
For the purposes of the DOL[3], if only education is provided, you will only need to provide the Defined Contribution Rollover Education (ES0661) or Defined Benefit Rollover Education (ES0715) (collectively, “Education Form”), as applicable. These rollover education forms discuss the benefits and shortcomings of staying in the existing plan, doing an IRA Rollover, moving to a new plan, or taking a distribution.  Electing one of these four options impacts the cost of the investments, as well as tax implications and the level of services available to the client. 

There may be instances in which you provide education about rollover options to the investor, and they decide to move forward with a rollover transaction; which only later results in a product recommendation to support the rollover.  In this scenario, you should complete the appropriate Education Form. This is because, in this scenario, the product recommendation came after the client made the decision to rollover the assets, subsequent to having first been educated on their options.
 
Challenges with Submitted Business
Processing your business as timely and efficiently as possible is in everyone’s interest: the client’s, yours, and ESI’s.  Keep in mind that some of the issues that could delay rollover business, specifically, include:

• Failing to complete an education form (ES0661 or ES0715) when business is submitted
• Failure to complete a PTE 84-24 disclosure form (If recommending a rollover into an annuity product)
• Recommending a rollover from a 401(k) plan without having obtained the required Form 404(a)(5), which describes the fees of the Plan, and without providing the needed analysis comparing the differences in costs and services between the plan and the recommended product.
• Failure to provide a rationale that sufficiently justifies a recommendation to rollover assets.

If you have questions about forms or other required documentation, you can reach out to ESI’s Suitability Review Principals for guidance.

[1]Under ERISA, you are a fiduciary if: 1) you provide advice or recommendations regarding purchasing or selling securities or other property of the plan for a fee; 2) you do so on a regular basis; 3) your advice is given pursuant to a mutual agreement or understanding; 4) the investment advice serves as a primary basis for the investment decision; and 5) the advice is individualized.

[2] Prohibited Transaction Exemption (PTE) 2020-02 permits a fiduciary to receive third-party compensation pursuant to meeting specified requirements in the PTE.  See “What Does It Mean To Be A Fiduciary?” for a more detailed discussion of the PTE.

[3] It should be noted that all Reg BI requirements related to rollover recommendations remain, independent of DOL regulations.

TC123724(1021)1