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Tom Giachetti

Regulation and Compliance > Federal Regulation > DOL

What Firms Must Disclose Before a Rollover Under New DOL Rule

By Thomas D. Giachetti

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Last month, colleague Joe Antonakakis and I discussed the Department of Labor’s Oct. 31 release proposing a rule that seeks to define an investment advice fiduciary for purposes of ERISA, and its proposed amendments to class prohibited transaction exemptions available to investment advice fiduciaries, including PTE 2020-02, the “rollover rule.”

For this column, I again sat down with Joe to learn more about the proposed rule’s corresponding additional disclosure and other requirements.

Disclosures

PTE 2020-02 currently requires financial institutions to provide certain disclosures to retirement investors before engaging in a transaction pursuant to the exemption.

Namely, the financial institution (i.e., an investment advisor) must provide a written acknowledgement that the institution and its professionals are fiduciaries and must also provide an accurate written description of the services to be provided to the retirement investor, as well as the financial institution’s material conflicts.

Further, before engaging in a recommended rollover, the financial institution must provide retirement investors with documentation of specific reasons why the rollover recommendation is in the retirement investor’s best interest.

As part of the amendments, the DOL is proposing additional disclosures: 

Pre-Transaction Disclosures

The proposed rule further requires that financial institutions include a written statement of the best-interest standard of care owed by the financial institution alongside its initial fiduciary disclosure.

Further, the proposed rule would require financial institutions to inform retirement investors of their right to obtain specific information regarding costs, fees and compensation from the institution.

The financial institution would need to provide the information in sufficient detail for the retirement investor to make an informed decision, including total compensation that the financial institution and investment professional receive, not just the costs directly paid by the retirement investor.

The proposed amendment provides model language to assist with compliance with the new pre-transaction disclosures.

Rollover Disclosures

Before engaging in a rollover or making a recommendation to roll over, the financial institution must consider and document its conclusions as to whether a rollover is in the retirement investor’s best interest and provide that documentation to the retirement investor.

Relevant factors to consider must include but are not limited to: the alternatives to a rollover including leaving the money in the plan or account type, comparative fees or expenses, whether an employer or other party pays for some or all administrative expenses, and the different level of fiduciary protection, services and investments available.

Web Disclosures

The DOL suggests it may require additional disclosures to be posted to the financial institution’s public website. If the DOL were to add this disclosure, it would also require financial institutions to provide retirement investors with a link to the web disclosure as part of the pre-transaction disclosures described above.

Obtaining Information

The DOL reaffirmed the requirement to obtain adequate information about the retirement investor’s current plan or account before making a rollover recommendation.

Financial institutions should make diligent and prudent efforts to obtain information about the fees, expenses and investment options offered in the retirement investor’s account.

Generally, such information is publicly available or can be obtained from the retirement investor.

If the information cannot be obtained from public sources or the retirement investor, the financial institution should make a reasonable estimate of the expenses, asset values, risk and returns based on publicly available information, and should document and explain the assumptions used in the estimates.

Thomas D. Giachetti is chairman of the Investment Management and Securities Practice of Stark & Stark. The legal practice of Giachetti, a former investment banker and NASD-registered representative, is devoted to investment-related matters, including the representation of investment advisors.

Pictured: Tom Giachetti

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