Retirement Account Rollovers: PTE 2020-02 vs PTE 84-24 | Faegre Drinker Biddle & Reath LLP

Recommendations to pension plan members to transfer their accounts from a plan to an individual retirement account or annuity will often be considered fiduciary advice under new guidelines from the Department of Labor (DOL). This orientation is a new interpretation of the DOL regulations of 1975 defining fiduciary boards. The new interpretation was disclosed and explained in the Preamble to Prohibited Transaction Exemption (PTE) 2020-02, which was issued by the Trump administration and authorized to go into effect by the Biden administration.

Insurance companies and their agents who provide “fiduciary” renewal recommendations will need to develop compliant fiduciary processes and will need to consider compliance with ERISA and Internal Revenue Code prohibited transactions rules. The exemptions or exceptions available are PTE 2020-02 and PTE 84-24.

This article deals with both fiduciary interpretation and these exemptions.

Board of Trustees

The DOL uses a five-part test to determine when a recommendation constitutes a board of trustees. One part of the functional definition is that advice is given on a “regular basis”. (“Functional” means that fiduciary status is determined by all of the facts and circumstances relating to the recommendation, including the consideration of the parties.) In the past, the DOL has held that a rollover recommendation would generally not satisfy to this part of the text. The guidelines accompanying PTE 2020-02, published in late 2020 (as developed and clarified in a set of FAQs) indicate that many renewal recommendations would now meet the “regular basis” requirement. However, if the Participant and the Investment Professional reasonably understand that the rollover recommendation is not made in anticipation of recurring IRA-related recommendations, the rollover recommendation would not meet the “regular basis” portion of the plan. fiduciary test.

For an insurance company and its agents, an example of the latter situation might be a recommendation to switch to a fixed rate annuity. Unless the agent has had an ongoing advisory relationship with the member regarding pension assets, the facts and circumstances may be that there is no anticipation for further advice in the future. . Thus, the recommendation would not satisfy the “regular basis” component and the recommendation for renewal would not be considered a fiduciary opinion. This contrasts with the recommendation of a variable annuity, where ongoing advice can be considered as part of the service provided to the member.

Prohibited transactions

One of the prohibitions under ERISA and the Code is that a trustee cannot use its authority to seek indemnification or cause an affiliate to receive compensation. Since a recommendation for reappointment that meets the regular base requirement (and will normally be a fiduciary opinion) will almost always result in an increase in compensation, an exemption will be required.

The two exemptions available for an insurance company and its agents are PTE 2020-02 and 84-24. Both have requirements or “conditions” that must be met in order to obtain the relief provided by the exemption.

PTE 2020-02

Under PTE 2020-02, if an “investment professional” (i.e. insurance agent) provides fiduciary advice to a “retirement investor” (i.e. a plan, a participant or an IRA holder), the “financial institution” company) is also considered a trustee. To take advantage of the PTE 2020-02, the insurance company and the agent must:

• Recognize their fiduciary status in writing.
• Disclose their services and significant conflicts of interest.
• Adhere to “impartial standards of conduct,” meaning that advice is in the best interests of the participant, that the insurance company and agent receive only reasonable compensation and that no misrepresentation is not done.
• The insurance company must adopt policies and procedures designed to ensure adherence to standards of impartial conduct and to mitigate conflicts of interest of the insurance company and the agent that might otherwise cause violations of these standards. .
• The insurance company must document and disclose to the retirement investor the specific reasons why a roll recommendation is in the member’s best interest.
• The insurance company must conduct an annual retrospective compliance review.

An important issue under PTE 2020-02 for insurance companies that work with independent agents is how the insurance company can know if the agent is acting as a trustee. In question 18 of the FAQ published by the DOL, the ministry explained that:

While the independent agent may recommend products issued by various insurance companies, PTE 2020-02 does not require insurance companies to exercise supervisory responsibility with respect to the practices of non-insurance companies. related and unaffiliated. Where an insurance company is the supervisory financial institution for the purposes of the exemption, its obligation is simply to ensure that the insurer, its affiliates and related parties comply with the conditions of the exemption in this regard. which concerns the annuity of the insurance company which is the object of the transaction.

In other words, the responsibility of an insurance company is to ensure that its products and services meet the standards of the exemption, including the best interest standard and that conflicts between the insurance company and the agent are properly attenuated.

To do this, the insurance company must:

• Adopt and implement prudent monitoring and review mechanisms to ensure agent compliance with standards of impartial conduct when recommending insurance company products.
• Avoid inappropriate incentives to preferably recommend the products, endorsements and annuity features that are the most lucrative for the insurance company at the expense of the retirement investor.
• Ensure that the agent receives only reasonable compensation (for example, by monitoring market prices and referrals for products, services and compensation from the agent of the insurance company).
• Comply with the disclosure and other conditions set out in the exemption.

The FAQs indicate that insurance companies could also comply with the exemption by creating monitoring and compliance systems through contracts with insurance intermediaries such as independent marketing organizations (IMOs).

However, due to the difficulty in complying with these requirements in the supervision of independent agents, many insurance companies may not use the 2020-02 exemption and instead opt for an 84-24 approach.

ETP 84-24

An alternative to PTE 2002-02 would be to rely on PTE 84-24. PTE 84-24 requires that:

• The transaction must be carried out by the insurance company or agent in the normal course of business.
• The transaction must be concluded on terms that are at least as favorable for the participant as an arm’s length transaction with an unrelated party would be.
• The combined total of all fees, commissions and other consideration received by the insurance company or agent must be “reasonable”.
• The insurance agent must make certain disclosures to an independent trustee of the plan (usually the sponsor or the plan committee), including any affiliation between the agent and the insurance company whose policy is recommended, the commission of sale payable in connection with the recommended transaction and any other costs associated with the purchase, holding, exchange, termination or sale of the recommended contract.
• The independent trustee must approve the transaction in writing.

Note that the PTE 84-24 only applies to insurance sales (life insurance and variable annuities, fixed indexed and at a fixed rate) and only applies to the collection of “commissions” (which no is not defined in the exemption). The exemption does not mention other types of financial benefits that might be received by an agent, and the DOL may disagree with a broad interpretation of the word “commission”. In the FAQ, the DOL notes that it is revising its regulation of fiduciary boards more generally, which may include amending or revoking parts of PTE 84-24 to remove variable annuities and fixed indexed annuities from its coverage. . It can also define “commission”; if so, the definition is intended to be narrow. The DOL may also add a standard of best interest to the exemption. If DOL adopts these approaches, IMOs and other insurance intermediaries might, in practice, need to seek individual exemptions as “financial institutions” under PTE 2020-02 to manage compliance with this exemption.

In the context of variable annuity sales, which would be made by agents also licensed as broker representatives, it may be more practical to rely on PTE 2020-02 since brokers will already comply with SEC Reg BI and will likely have to use PTE 2020-02 for other business activities.

Conclusion

In the short term, PTE 84-24 may be an easier way for insurance companies to avoid the requirements of PTE 2020-02. An insurance company relying on PTE 2020-02 must adhere to the Standards of Impartial Conduct, adopt oversight policies and procedures, provide additional information to participants, and conduct an annual compliance review. However, it is possible – perhaps even likely – that new, more demanding conditions will be added to 84-24. But that’s over a year away, and the current 84-24 can be an effective transition approach.