Rollovers and Documentation

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare.  We bring Case of the Week to you to highlight the most relevant topics affecting your business.  

A recent call with a financial advisor from is representative of a common inquiry related to service with a predecessor employer. The advisor asked: “When providing rollover advice under Prohibited Transaction Exemption (PTE) 2020-02, what constitutes the necessary documentation and disclosure needed?”

Highlights of Discussion 

If investment advice involves a rollover recommendation, in addition to several other requirements under PTE 2020-02, financial advisors must 

• Document the reasons that a rollover recommendation is in the best interest of the retirement investor; and  

• Disclose the justification for the rollover in writing to the retirement investor. 

To satisfy the documentation requirement for rollovers from an employee benefit plan to an IRA, investment professionals and financial institutions should make diligent and prudent efforts to obtain information about the existing qualified retirement plan and the participant’s interests in it. As stated in a series of frequently asked questions on PTE 2020-02, the DOL identified the ideal documentation as a copy of the plan participant’s ERISA §404(a)(5) fee disclosure (see FAQ #15).

According to DOL Regulation 2550.404a-5, a participant’s fee disclosure consists of two parts:  1) An annual notice that discloses certain plan- and investment-related information; and 2) quarterly statements that disclose the fees or expenses actually charged to each individual.  Don’t be surprised in plan participants may not be familiar with what this is. 

If, despite requesting the participant’s fee disclosure and explaining the importance of having such information, a participant fails to share the information, a financial advisor could rely on alternative data sources, such as the most recent Form 5500 or reliable benchmarks on typical fees and expenses for the type and size of plan at issue. The process and outcome of requesting the fee disclosure should be documented.

To satisfy PTE 2020-02 with respect to a rollover recommendation, financial institutions and investment professionals must disclose to the investor the specific reasons that a rollover of assets from a workplace retirement plan to an IRA, or from one type of account to another, is in the best interest of the retirement investor. 

Conclusion

In addition to other requirements, PTE 2020-02 requires investment advice fiduciaries who give rollover advice to document and disclose the specific reasons why the rollover advice given is in the best interest of the participant. The DOL offers guidance on both in a series of FAQs.