Managing retirement savings is one of the most crucial aspects of wealth management. After all, most investors have worked, quite literally, their entire lives to save for their post-retirement future.
To protect clients’ best interests when it comes to retirement savings and rollover recommendations provided by financial institutions, the U.S. Department of Labor (DOL) added a new compliance rule for finance professionals called the Prohibited Transaction Exemption 2020-02, Improving Investment Advice for Workers & Retirees (PTE-2020-02).
With the final compliance deadline of June 30, 2022 in our rearview, it’s time for wealth management firms to get in line. This blog will discuss what you need to know about PTE-2020-02, how to comply with the June deadline, and a few common mistakes to avoid.
What Is PTE-2020-02? A Timeline
The main goal of PTE-2020-02 is twofold: First, to protect investor’s best interests when it comes to rollover retirement savings. Second, to enable fiduciaries to receive compensation under the exemption by requiring them to prove (and document) that any rollover advice is in the customer’s best interest.
Despite PTE-2020-02 already largely being in effect (it was passed in December 2020), the DOL has given certain extensions in order for firms to become compliant. Here’s a quick refresher on the timeline for PTE-2020-02, including key deadlines that wealth management firms need to comply with.
A PTE-2020-02 Timeline
- December 18, 2020: PTE-2020-02 announced by DOL.
- February 16, 2021: PTE-2020-02 goes into effect.
- April 2021: The DOL releases a FAQ page about PTE 2020-02.
- December 20, 2021: DOL will not pursue claims prior to this date to provide transitional relief for fiduciaries working in good faith to comply with “Impartial Conduct Standards” in PTE-2020-02.
- October 25, 2021: In Field Assistance Bulletin 2021-02, the DOL extends non-enforcement policies through January 31, 2022.
- February 1, 2022: Deadline for fiduciaries to comply with all but documentation and disclosure portion of PTE-2020-02
- June 30, 2022: Final deadline for fiduciaries to comply with all requirements of PTE-2020-02, including the proper documentation and disclosure procedures outlined.
As you can see, all of the enforcement and implementation deadlines have long passed. In the next section we’ll discuss why this is, and what type of documentation you’ll need to comply.
Three Requirements for Disclosure & Documentation Under PTE-2020-02
There are three main disclosure requirements for investment professionals under PTE-2020-02, as explained in the DOL’s FAQ page:
- An acknowledgement of the firm’s fiduciary status in writing.
- A description of the services provided, expected fees, and any material conflicts of interest.
- Documentation of the reasons why a rollover recommendation is in the investor’s best interest, and that document being provided to the retirement investor.
While the first two disclosure requirements are more or less simple to comply with in a single document, the final requirement brings something entirely new to the table.
What should be included in a rollover recommendation disclosure for PTE-2020-02?
In the FAQ, the DOL expounds that the relevant factors firms need to consider in a rollover recommendation disclosure include but are not limited to:
- Fees and expenses associated with the rollover plan and an IRA
- Viable alternatives to a rollover, including leaving money in the investor’s employer plan
- How much employers pay for the plan’s administrative expenses
- What services and investments are available to the investor under the plan and IRA
In summary, wealth management firms must provide a full analysis of why a rollover recommendation is prudent that considers these factors and more. Streamlining and creating an entirely new compliant framework for a rollover analysis isn’t easy and is largely why the deadline for documentation and disclosure was extended until the end of June 2022.
For more tips on streamlining your documentation procedures, check out the Docupace blog here.
Avoid These 5 Mistakes to Comply With PTE-2020-02
Staying compliant with PTE-2020-02 is easier when you know some of the key mistakes to avoid. Here are five common mistakes firms make when it comes to PTE, and how to avoid them.
- Watch out for implied recommendations, and don’t try to get around the rule with creative wording in your disclosures.
- Remember that rollovers are defined broadly — it also includes IRA-to-IRA transfers, a qualified plan to an IRA, a plan to a plan, an IRA to a plan, or any change of account type from commission-based to fee-based for a plan or an IRA.
- “Plan” and “IRA” are defined broadly, plan accordingly.
- Make sure your fiduciary acknowledgement isn’t deficient — it should comply with both the Code and ERISA.
- Make sure to assess the reasonableness of compensation in your documentation. The DOL uses a market-based standard, so having benchmarking services to help might be prudent to comply with this requirement.
In short, to successfully comply with PTE-2020-02, wealth management firms need to ensure their documentation management systems are ready. Specifically, are there workflows, automated processes, and organizational protocols to ensure firms stay compliant with the new requirements? If not, you might consider a digital solution like Docupace to bridge the gap.
At Docupace, our cloud-based Compliance TRACKR™ helps advisory firms simplify and digitize client disclosure requirements. This solution is purpose-built to keep you on the right side of PTE-2020-02 and meet all the regulatory requirements. TRACKR sits on top ofour world-class documentation management software and helps compliance teams stay organized and efficient. With over 20 years in the industry, we’re a leader in helping wealth management firms stay compliant in an ever-changing landscape. Reach out to learn more here.
