New DOL Fiduciary Rule Stayed: What Advisors and Insurance Agents Recommending Rollovers Should Do Now

At a Glance

• Following the stays that were issued by the Texas courts, the September 23, 2024, effective date for the DOL’s new fiduciary rule and the amendments to PTE 2020-02 and PTE 84-24 will not go into effect pending the outcome of the lawsuits challenging the rule and amended exemptions. As a result, the current DOL fiduciary regulation continues to apply as do the current versions of PTE 2020-02 and PTE 84-24.
• Advisors who recommend plan-to-IRA rollovers — even if they aren’t “existing” plan fiduciaries — should consider using a process consistent with the conditions in PTE 2020-02, since compliance with SEC requirements will require similar steps in any case.
• Advisors who receive conflicted compensation as a result of an IRA-to-IRA transfer recommendation should consider complying with PTE 2020-02. In addition, an IRA transfer recommendation is an account type recommendation under SEC guidance, and the SEC’s best-interest process for IRA transfer recommendations would likely be aligned with that of DOL’s — that is, the investments and services in the existing IRA should be compared to those in the proposed IRA, and that comparison should be evaluated in light of the needs and circumstances of the investor.

Two recent Texas court decisions stayed the fast-approaching September 23, 2024, effective date of the DOL’s new fiduciary rule (including both the new regulation re-defining “fiduciary” investment advice and the related amended prohibited transaction exemptions 2020-02 and 84-24). The stays will remain in effect until the cases are decided and appeals are resolved. This means that the current regulatory definition of fiduciary status, which is the “five-part test” from the DOL’s 1975 regulation, as well as the current versions of the exemptions, will continue to apply until the lawsuits are fully resolved.

As a result and for the time being, in order for the recommendations of an investment advisor (i.e., a broker-dealer or investment adviser) or an insurance agent to a retirement plan, participant or IRA to constitute “fiduciary” advice, the five-part test will still need to be satisfied. While that much is clear, and while an initial reaction might be that one-time recommendations are never fiduciary advice (as one of the requirements of the five-part test is that advice must be given on a “regular basis”), there may still be a few one-time recommendations that rise to the level of fiduciary advice and that, therefore, will require compliance with PTE 2020-02.

The new and now-stayed DOL fiduciary rule would have significantly expanded the definition of fiduciary advice to cover a broad range of one-time financial recommendations by insurance agents (“agents”) and registered investment advisers, broker-dealers and their representatives (“advisors”). Where those recommendations involved conflicts of interest (i.e., prohibited transactions under ERISA and the Internal Revenue Code), advisors and agents would have needed to rely on Prohibited Transaction Exemption (PTE) 2020-02 (for securities and other investment-related recommendations by advisors and agents) or PTE 84-24 (which would have been available only for nonsecurity insurance and annuity recommendations by independent agents) in order to receive the compensation that resulted from their fiduciary recommendations. This is because the resulting compensation is considered conflicted — i.e., it is compensation that the agent or advisor would not have received absent the recommendation. PTE 2020-02 and PTE 84-24 were amended at the same time as the new fiduciary regulation; and some of the amended PTE provisions would have been effective on September 23, 2024, as well.

Now, following the stays that were issued by the Texas courts, the September 23, 2024, effective date for the regulation and the amendments to PTE 2020-02 and PTE 84-24 will not go into effect pending the outcome of the lawsuits challenging the regulation and amended exemptions. As a result, the current DOL fiduciary regulation continues to apply as do the current versions of PTE 2020-02 and PTE 84-24 (which is far less demanding than PTE 2020-02, and covers all types of insurance and annuity recommendations by different types of advisors and agents).

Background — The Current Definition of Fiduciary Advice

For context, let’s review the scope of the current DOL fiduciary regulation, taking into consideration (1) the DOL’s expanded interpretation of the rule in the preamble to PTE 2020-02 and (2) the implications of a 2023 Florida court decision setting aside the expanded fiduciary interpretation for rollover recommendations from a plan to an IRA where the professional has no preexisting fiduciary relationship with the plan.

1. Current Fiduciary Advice Definition (the Five-Part Test)

Under current DOL regulations, a person is a fiduciary to an ERISA plan or an IRA if the person satisfies the following five-part test: (1) is providing advice about investments for a fee (2) on a regular basis, (3) under a mutual understanding with the plan fiduciary, plan participant or IRA owner, (4) that the advice will serve as a primary basis for investment decisions with respect to plan or IRA assets, and (5) that the advice is based on the particular needs of the plan, participant or IRA owner.

2. The DOL Guidance (Before PTE 2020-02)

The DOL issued guidance in 2005 (Advisory Opinion 2005-23A, often referred to as the Deseret letter) regarding fiduciary status for rollover advice. In that guidance, the DOL indicated that if the person was already a fiduciary advisor to the ERISA plan, then a rollover recommendation would be considered a fiduciary act. On the other hand, if a person was not a fiduciary to the ERISA plan and recommended a rollover to a plan participant, then the rollover recommendation would not be considered a fiduciary act under the five-part test. Under this interpretation, an advisor or agent — with no prior relationship to an ERISA plan or participant — could recommend a rollover without becoming subject to the ERISA duties of prudence and loyalty and the prohibited transaction rules.

While the Deseret letter was withdrawn by the DOL in 2020, it is likely that the DOL continues to believe that a recommendation to roll over by an “existing” plan fiduciary would constitute fiduciary advice even while the new regulation is stayed. In that case, advisors would need the relief provided by compliance with the current PTE 2020-02.

Further, as fiduciary management of participant accounts becomes more popular, and while there isn’t any explicit guidance, the DOL could take the position that, where an advisor is a fiduciary for investment management of the participant’s account and makes a rollover recommendation to an IRA that will pay the advisor additional compensation, the recommendation is a fiduciary act, again necessitating the relief provided by PTE 2020-02 with respect to the “conflicted” compensation resulting from the rollover.

3. The DOL’s Expanded Interpretation

The DOL expanded its interpretation of fiduciary advice with respect to rollovers in the Preamble to the prior (current) version of PTE 2020-02 by taking the position that a person is deemed to be providing advice on a “regular basis” if the person either (1) has a preexisting advice relationship with the investor on tax-qualified retirement assets (e.g., advising on another IRA), or (2) anticipates that the rollover recommendation is the first step in an ongoing financial relationship concerning tax-qualified retirement assets (e.g., the rollover IRA). The DOL explained its position in more detail in Frequently Asked Questions (FAQs) issued after the issuance of the PTE. With this interpretation and because the other four parts of the five-part test are met for most rollover recommendations, advisors who make rollover recommendations, in most instances, would need to satisfy PTE 2020-02.

In short, the DOL explained that this interpretation represented a change to its view with respect to one aspect of the Deseret letter — namely, the part that addresses one-time recommendations by a person who does not have an existing fiduciary relationship with the plan. Under its interpretation, the absence of an existing fiduciary relationship with the plan in question would not necessarily prevent a rollover recommendation from being fiduciary advice, either because of dealings with the participant unrelated to the specific plan from which the rollover was being recommended, or because the rollover recommendation would be the first recommendation in what was anticipated to become a “regular basis” advice relationship.

4. The 2023 Florida Court Decision

On February 13, 2023, the court in American Securities Association (ASA) v. U.S. Department of Labor, Case No. 8:22-cv-330 (M.D. Fla. Feb. 13, 2023)) set aside the DOL’s expanded interpretation of fiduciary investment advice for rollover recommendations from a plan to an IRA where the professional has no preexisting fiduciary relationship with the plan. The ASA court determined that ERISA requires that the regular basis test should be made with reference to the advice provided to a particular plan (from which the rollover was being recommended) and could not be connected to the rollover IRA — that is, the participant’s retirement plan is one “plan,” and an IRA is a different “plan” — reasoning as follows:

“Before a rollover occurs, a professional who gives rollover advice does so with respect to an ERISA-governed plan. However, after the rollover, any future advice will be with respect to a new non-ERISA plan, such as an IRA that contains new assets from the rollover. The professional’s one-time rollover advice is thus the last advice that he or she makes to the specific plan. So, while an offer to provide future advice may, as the Department suggests, be the beginning of a relationship, that relationship is inherently divorced from the ERISA-governed plan. Because any provision of future advice occurs at a time when the assets are no longer plan assets, it is not captured by the “regular basis” analysis. Because the policy referenced in FAQ 7 abandons this plan-specific focus in the context of rollovers, it sweeps conduct into its purview that would not otherwise trigger fiduciary obligations.”

Under this reasoning, the ASA court concluded that the DOL’s interpretation of “regular basis” with respect to one-time advice to rollover plan monies to an IRA was arbitrary and capricious and should be vacated. The ASA decision did not address rollover recommendations that were considered fiduciary advice under the Deseret letter — namely rollover recommendations by a professional with a preexisting fiduciary relationship to the plan or the participant.

What This Means for Agents and Advisors

Based on the current DOL fiduciary rule as interpreted by the DOL and the ASA court, here are some observations about the application of the current regulation’s fiduciary definition to some kinds of rollover recommendations:

1. Plan-to-IRA Rollover Recommendations

A plan-to-IRA rollover recommendation does not typically meet the regular basis test, and therefore should not constitute fiduciary advice, if the advisor does not have a preexisting fiduciary relationship to the plan or with the participant in the plan (e.g., managing the participant’s plan account). However, if the advisor is a fiduciary to the plan (whether or not in connection with the specific individual receiving the rollover recommendation), the advisor will likely need to satisfy the ERISA duties of prudence and loyalty and satisfy the conditions in PTE 2020-02 in order to receive and retain compensation from the IRA.

However, even if the advisor has no preexisting fiduciary relationship to the plan, the recommendation to roll over from a plan will still be subject to a fiduciary-like “best interest” standard under SEC rules (that is, Reg BI and the SEC’s 2019 Investment Adviser Interpretation) that is similar to ERISA’s duties of prudence and loyalty, assuming the advisor is a registered investment adviser or broker-dealer. Based on guidance in an SEC staff bulletin, the staff defines a rollover recommendation as the recommendation of an account type subject to a best-interest standard. It then describes the process to satisfy that standard in a manner that is very close to the DOL’s best-interest standard in current PTE 2020-02 — namely, consideration of relevant factors about the investor, the investor’s retirement plan (including investments, services and expenses) and the investments, services and expenses in the contemplated rollover IRA.

For this reason, advisors who recommend plan-to-IRA rollovers — even if they aren’t “existing” plan fiduciaries — should consider using a process consistent with the conditions in PTE 2020-02, since compliance with SEC requirements will require similar steps in any case. That process would entail: (1) gathering information about the plan participant that is relevant to the rollover decision; (2) gathering information about the investments, services and expenses in the plan and the participant’s account; (3) considering the contemplated rollover IRA including the services, investments and fees; and (4) evaluating which option is in the participant’s best interest. In addition, advisors should consider documenting the analysis for both SEC and DOL compliance purposes. (Note that the discussion of disclosures under the PTEs is beyond the scope of this article.)

2. IRA-to-IRA Transfer Recommendations

In evaluating the DOL’s expanded interpretation of “regular basis” in the plan-to-IRA rollover setting, the ASA court reasoned that regular basis should be determined with reference to the advice provided to a particular plan, and since a rollover IRA is a separate “plan,” the “regular basis” test could not connect two “plans.”

Would that same reasoning apply to a recommendation to transfer an IRA?

While the issue is not clearly resolved by current guidance, the DOL could potentially assert that, in the case of an IRA transfer, it is the same account (e.g., Joe Smith’s IRA) that is being transferred from the current firm to a new firm and therefore, under the DOL’s reasoning, the regular basis test could be met because the transfer is the first step in an ongoing financial relationship to the same “plan” — that is, the IRA.

For this reason, advisors who receive conflicted compensation as a result of an IRA-to-IRA transfer recommendation should consider complying with PTE 2020-02. In addition, an IRA transfer recommendation is an account type recommendation under SEC guidance, and the SEC’s best-interest process for IRA transfer recommendations would likely be aligned with that of DOL’s — that is, the investments and services in the existing IRA should be compared to those in the proposed IRA, and that comparison should be evaluated in light of the needs and circumstances of the investor.

Conclusion

We do not know whether the DOL will appeal the stays issued by the Texas courts or proceed directly to hearings on the merits. However, we do know that both of the Texas courts have indicated that the plaintiffs challenging the new fiduciary rule and amended exemptions are likely to prevail. If the courts do rule in favor of the plaintiffs, the DOL will almost certainly appeal the decisions to the Fifth Circuit Court of Appeals. The losing party at the appeal court could request an en banc hearing of the Fifth Circuit judges and, ultimately, ask that the Supreme Court consider the case. The litigation process is likely to take several years.

In the meantime, the fiduciary status of advisors and agents will be measured under the current regulation’s five-part test. However, in some cases the application of that test could result, as this article explains, in apparent one-time recommendations being deemed to satisfy the five-part test. As a result, advisors and agents, and their firms, should carefully consider where fiduciary status for retirement accounts may apply and, in those cases, should consider complying with the conditions of an applicable prohibited transaction exemption — i.e., PTE 2020-02 in most cases, or possibly PTE 84-24 in the case of a rollover to, or transfer of, an annuity product.