Quick Hits

  • Who is a fiduciary is going to be more commonplace to include most investment advisers.
  • Prohibited Transaction Exemption (PTE) 2020-02 has been amended to add certain conditions, including following a loyalty obligation similar to the SEC’s Regulation Best Interest standard.
  • The DOL fiduciary rule applies to those who provide investment advice when an individual is rolling over, as well as when a retirement plan sponsor is transferring or distributing plan assets.

Who is a fiduciary is now going to be more commonplace. This is because of the newest prong of the definition of a fiduciary when rendering investment advice. If an investment recommendation is made to a plan, a participant, or a beneficiary, or to a plan fiduciary, and the person making the recommendation acknowledges or represents that he or she is a fiduciary under Title I or Title II of the Internal Revenue Code), the person is a fiduciary. This is not new. What is new is a person is also a fiduciary if he or she regularly makes investment recommendations to investors as a part of his or her business, and “the recommendation is made under circumstances that would indicate to a reasonable investor in like circumstances that the recommendation is based on review of the retirement investor’s particular needs or individual circumstances, reflects the application of professional or expert judgment to the retirement investor’s particular needs or individual circumstances, and may be relied upon by the retirement investor as intended to advance the retirement investor’s best interest.” 29 C.F.R. § 2510.3-21(c)(1)(i). Included in this investment advice is the rolling over, transfer, and distribution of plan assets, and the recommendation as to whether to engage in the transaction, the amount, the form, and the destination.

Therefore, investment advisers to employer-sponsored retirement plans, as defined under Section 3(21) of the Employee Retirement Income Security Act (ERISA), will now be fiduciaries, not just ERISA Section 3(38) investment managers. Plan sponsors may want to ensure that investment advisers take on the responsibility of being plan fiduciaries. Sponsors may also want to amend their investment service agreements to provide for fiduciary status of the service providers. As the distribution of plan assets is also now a part of fiduciary investment advice, sponsors of traditional pension plans that are terminating their plans in favor of purchasing an insured group annuity may want to include a review of the insurer’s underlying investments as a part of their fiduciary due diligence.

PTE 2020-02—“Improving Investment Advice for Workers & Retirees”

PTE 2020-02, a widely-used exemption from ERISA’s prohibited transaction rules that allows investment advice fiduciaries to plans to receive variable “reasonable” compensation, has been amended to add conditions, including following a loyalty obligation similar to the U.S. Securities and Exchange Commission’s (SEC) best interest standard of care. This means the interest of the adviser cannot be ahead of the interest of the customer, and any conflicts of interest need to be mitigated. Conflicts are defined broadly so this could prove to be difficult. Fee disclosures and acknowledgement of fiduciary status are also required. Fiduciaries with convictions or judgments of financial or tax crimes, or abuse of their position, are ineligible for the exemption, similar to the amended PTE 84-14, regarding qualified professional asset managers (QPAMs) (discussed below).

The effective date of the final regulation is September 23, 2024. There will be a one-year transition period that follows for certain conditions in the exemptions to be met.

Additional DOL Guidance Affecting Plan Sponsors

PTE 84-14QPAM Exemption

Plan sponsors relying on the QPAM exemption for certain investments in their plans may want to be on the lookout for notice of loss of the exemption for certain criminal convictions or prohibited misconduct by the QPAM or its affiliates. There is a one-year transition period from the date of ineligibility. The amended PTE provides that plan sponsors must be allowed to terminate their arrangement with the QPAM and withdraw from the managed investment, with indemnification for any losses to their plan resulting from the crimes or misconduct. Plan sponsors may want to confirm that these additional obligations are included in QPAM agreements going forward. The amendment to PTE 84-14 is effective on June 17, 2024.

Ogletree Deakins’ Employee Benefits and Executive Compensation Practice Group will continue to monitor developments and will provide updates on the Employee Benefits and Executive Compensation blog as additional information becomes available.

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