“Final” Guidance for Retirement Investors and Trusted Retirement Investment Professionals

We are in the midst of a historic wave of retirements at a time when individual saving and investment for retirement has largely replaced the pensions past generations relied upon in retirement. At the same time, investment alternatives abound, fee structures are complicated, and markets are volatile. What are a retirement investor and their trusted advisor to do?

In its continuing efforts to protect retirement investors and provide guidance to investment professionals, the Department of Labor recently released its new rule, “Improving Investment Advice for Workers & Retiree Exemption,”[i] scheduled to become effective after the January change in administration in Washington, D.C.

The Rule is broad in scope and today we focus on a single aspect of the Rule – advice and decisions related to the rollover of an employer retirement plan (technically referred to as a “Title I Plan”) to an individual retirement account (“IRA”) for a fee that varies based on investment advice. Rollovers of this type are estimated to total approximately $2.4 trillion from 2016 to 2020.[ii]

Variable fees, which would otherwise not be permissible under the applicable laws, are allowed if the requirements of the Rule are met (the “Exemption”).

Important to Know:

• Impartial Conduct Standards – The Impartial Conduct Standards are the cornerstone of the Exemption under the new Rule. In short, the investment advice given by an investment professional to a retirement investor is to be in the best interest of the retirement investor at the time it is given. It must place the interests of the retirement investor ahead of that of the investment professional and the financial institution. Where might these interests potentially conflict? When the fee charged varies based on the investment advice or investment is made in proprietary products of the financial institution are two common occurrences.

• Reasonable Compensation and Best Execution – Financial institutions may charge reasonable compensation. As securities laws require, the financial institution and investment professional are to seek the best execution of investment transactions.

• Disclosure and Documentation – Knowledge is power and transparency is key. If the fee charged will vary based on the investment advice, in order to fall within the Exemption, prior to engaging in a rollover to an IRA, the financial institution is required to provide the retirement investor with its written acknowledgement that the financial institution and the investment professional are fiduciaries, a written description of the services to be provided and material conflicts of interest and documentation of the specific reasons for the rollover recommendation.

In order to implement the principles of the Impartial Conduct Standards, financial institutions are required to have policies and procedures in place, including for the documentation of the specific reasons for a rollover recommendation. This is perhaps the most important consideration for the retirement investor relying on a trusted advisor to provide guidance in an area they may have little knowledge about. Financial institutions are also required to conduct an at least annual retrospective review of their compliance and they have a grace period for self-correction of any violations.

The Rule has been the subject of much conversation, comment, and even controversy. What is clear is that aligning the interests of retirement investors and the investment professionals who serve them in order to provide access to greater financial security in retirement is in the best interest of both.

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[1] Department of Labor, Employee Benefits Security Administration, 29 CFR 2550 (December 15, 2020).

[1] Cerulli Associates, “U.S. Retirement Markets 2019.”