Best Interest Reasons for a Rollover: PTE-2020-2 Allows for Circumstances That Outweigh an IRA’s Costs

Benefits and executive compensation partner Fred Reish and counsel Joan Neri coauthored an article for PLANADVISER discussing registered investment advisers (RIAs) who use the Department of Labor’s (DOL) Prohibited Transaction Exemption (PTE) 2020-02 to avoid prohibited transactions when advising 401(k) plan participants about distributions and plan rollovers.

In the Q&A article, one such RIA mentioned the PTE requirement to determine that a rollover recommendation to an RIA-managed individual retirement account (IRA) is in the participant’s best interest, and they asked, “What is considered a best interest reason for a rollover?”

Reish and Neri explain that while the DOL does not offer a list of best interest reasons for a rollover, it provides a guided approach for determining a best interest reason. The PTE requires that the rollover recommended be provided to the participant in writing before the rollover is implemented.

The authors list five key components that should be evaluated when determining the best interest reasons, including (1) the participant’s financial needs and investment objectives, (2) the participant’s current plan investments, services and fees, (3) the managed IRA program, (4) whether the managed IRA is in the participant’s best interest and (5) the best-interest reasons.

In conclusion, the authors recommend that RIAs identify and document specific reasons that the person’s best interest will be served, and they provide examples that might apply to some participants.

The full article is available for PLANADVISER subscribers.