DOL Update for ESI Registered Representatives
Hosted by DOL Strategy Team
Interested in learning more about potential impact points of the new DOL regulations and the progress ESI has made in addressing them? Join us for a webinar regarding the new DOL regulations on Friday, September 24 or Thursday, September 30.
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Friday, September 24, 2021
11:00am ET
Register here – https://nationallife.zoom.us/meeting/register/tJArdOCoqz0sGNaM9rpcGufvJ32-a03MKKev
Thursday, September 30, 2021
4:00pm ET
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After registering, you will receive a confirmation email with instructions for joining the session.
TC123281(0921)1
Impact to Rollovers and PTE 2020-02 Under Upcoming Dept. of Labor (DOL) Changes
Summary
Recently, the Department of Labor (DOL) provided new guidance concerning who it considers to be a “fiduciary” under the Employee Income Retirement Security Act of 1974 (ERISA). This has created fundamental changes to the regulations that apply to the advice you provide to most qualified accounts, with the most profound impact on IRA Rollover transactions. Simultaneously, the DOL created new rules that will need to be followed to receive compensation in connection much of the advice that you provide regarding qualified funds.
Enforcement of these new rules will begin on December 20, 2021. This is the first of a series of communications between now and the enforcement date in which ESI will convey its revised policies, procedures, and forms designed to comply with the rule.
Background
Under ERISA, an individual or entity acts as a fiduciary with respect to many retirement accounts if they provide investment advice for compensation. Applying a five-part test, investment advice is provided, and you will be deemed to be a fiduciary, if you:
- Render advice as to the value of securities or other property, or made recommendations as to the advisability of investing in, purchasing, or selling securities or other property;
- Provide such advice on a regular basis;
- Provide such advice pursuant to a mutual agreement, arrangement, or understanding with the plan, plan fiduciary or IRA owner;
- The advice serves as a primary basis for investment decisions with respect to the plan or IRA assets; and
- The advice is individualized based on the particular needs of the plan or IRA.
Under previous DOL guidance, Registered Representatives (“RR”) and Investment Advisory Representatives (“IAR”) were deemed not to meet this five part test. However, the DOL withdrew this guidance, and now state that if a RR or IAR provides ongoing advice after the rollover, they are likely to be a fiduciary when the recommendation to do a rollover was made.
- If a fiduciary recommends a transaction that results in certain types of compensation, the transaction is deemed to be a “Prohibited Transaction.” Specifically, when earning compensation, a fiduciary may not deal with the income or assets of a plan or IRA in their own interest or for their own account; and
- A fiduciary may not receive payments from any third party dealing with the plan or IRA in connection with a transaction in the plan or IRA (i.e. compensation must come directly from the client or plan assets).
Practically, this presents the most challenges for commission-based business. For example, if your advice results in your receipt of more compensation than you would have otherwise earned (for example, being paid a 5% commission for an equity mutual fund instead of a lower commission for a fixed income fund), then you are said to deal with the assets of a plan or IRA for your own account. Additionally, when the commission is paid for by a mutual fund company or insurance company, the fee is not paid by your client, but instead a third-party.
Regarding rollover recommendations, there is almost always a prohibited transaction. If you recommend that your client stay in the qualified plan, you will earn no compensation. If you recommend a rollover, you will earn compensation when investments are made. Because your compensation will differ based on the advice you provide, a rollover recommendation almost always results in a “Prohibited Transaction” under ERISA.
What do I need to know?
There are three scenarios in which commissions can still be paid to you for rollover business:
1. Education
In connection with Regulation Best Interest, ESI created two paths for rollovers: 1) recommendations and 2) education. In conjunction with that, ESI published training material specifically designed to clarify the difference between making recommendations and providing education (click here to review the Reg BI training).
Under the DOL, and similar to Regulation Best Interest, you are not providing investment advice and you are not a fiduciary under ERISA if you do not provide a recommendation concerning an IRA rollover, but only educate an investor on their options. Accordingly, if you only provide education, as of December 20, 2021, IRA rollovers under ERISA will be very similar to IRA rollovers under Regulation Best Interest today.
The key element here is that you provide education to the investor and allow them to determine what course of action they want to take. So, what does education look like? Here are some examples:
- Discussing the options available to the investor, including (if applicable) leaving the assets in the current plan;
- Discussing the characteristics of IRAs and employer-sponsored plans;
- Discussing the costs and fees associated with available options;
- Discussing the availability of investment options in an employer-sponsored plan versus those of an IRA;
- Discussing the tax implications of leaving or moving assets;
- Discussing the differences between asset categories;
- Discussing general investment concepts such as risk versus returns, diversification, tax deferral, etc.
To assist you in educating clients on their rollover options, ESI provides a disclosure document that discusses a client’s options in a neutral fashion, so they can make their own well-informed decision.
2. PTE 84-24
An ERISA fiduciary can nevertheless engage in a Prohibited Transaction, if they comply with what is known as a “Prohibited Transaction Exemption,” or “PTE.”
One of these is PTE 84-24. It permits ERISA fiduciaries to receive payment of a commission for insurance products (including variable universal life, variable annuities, registered indexed linked annuities and fixed indexed annuities), provided they comply with certain requirements. Perhaps the most notable requirement is that you disclose, in writing, the compensation you will receive in connection with the transaction you are recommending. Additionally, the disclosure of compensation will need to be acknowledged and signed by your client and returned to ESI.
Under this exemption, fiduciaries recommending a rollover from an ERISA plan to an insurance product can receive a commission without violating the DOL’s prohibited transaction rules. It is rumored that the DOL may make future changes to 84-24, and its requirements may change in the future. However, in the meantime it is a fairly streamlined process that will be used when selling insurance products.
3. PTE 20-02
A new Prohibited Transaction Exemption, knowns as “PTE 20-02,” was created with the new DOL guidance. Under PTE 20-02, investment professionals can receive payments that would otherwise violate the prohibited transaction rules (e.g., commissions and trails) if they:
- Comply with the Impartial Conduct Standards. Generally, these are complied with if your recommendations are in a client’s best interest, if the compensation you earn is reasonable, and if you have not made any misleading statements about the investments you are recommending; and
- Provide various written disclosures to the investor. These disclosures will acknowledge the fiduciary status of both you and ESI, as well as describe the services we provide and the conflicts of interest that apply to us. Additionally, when a rollover recommendation is made, the reasons for the recommendation must be documented and provided to the investor prior to the transaction.
There are additional requirements that must be met to use PTE 20-02, but these are back office requirements being addressed by ESI, and usually should not impact you.
Much like Regulation Best Interest, being a fiduciary under ERISA, and its impartial conduct standards, will require that Representatives focus on any increase in costs as a result of an IRA rollover. ESI is developing new forms and work flows to assist you with this compliance.
How does this affect my business?
If your usual practice is to provide only education when engaging in IRA rollovers today, the changes to your process, effective December 20, 2021, will be minimal. Providing education and allowing the customer to make a decision will be the least disruptive means of assisting them with their rollover needs.
However, if you recommend IRA rollovers, the DOL will likely consider you to be a fiduciary. To receive compensation resulting from rollover recommendations, ESI will require the use of a PTE when you submit this business. Specifically:
- For insurance products sold through ESI (VAs, VUL, FIAs and RILAs), PTE 84-24 will be used;
- For all other products, PTE 20-02 will be used.
Additionally, the DOL will likely consider Representatives to be fiduciaries when providing ongoing advice to existing and new IRA investors, even if a rollover transaction does not occur. Thus, ongoing advice will require the use of PTEs, as well.
Questions
As ESI continues to amend forms, update procedures, and evaluate the changes necessary to meet the new requirements there will be additional communications. In the meantime, questions about this communication may be directed to Scott Solod (ssolod@nationallife.com) or Tom Longfellow (tlongfellow@nationallife.com) in ESI Compliance.
TTC123283(0921)1