The question of when an investment professional is obligated to act as a fiduciary when recommending a rollover to a retirement saver has become a tricky issue to navigate. This confusion arises from a tangled web of regulatory guidelines, overlapping fiduciary definitions, and the Department of Labor’s (DOL’s) ongoing, but as-yet unresolved, attempts to revise its fiduciary rules. As a result, financial advisors and financial professionals may find themselves unsure of the precise obligations they must meet when advising clients on rolling over retirement plan assets.
Currently, the regulatory landscape for advisors and others working with retirement savers remains complex but manageable. Under the prevailing rules, making a one-time recommendation to roll over retirement plan assets into an IRA does not constitute fiduciary advice, meaning that such recommendations do not require compliance with a prohibited transaction exemption (PTE). However, professionals providing securities recommendations, including a one-time recommendation to roll over retirement plan assets, must still comply with the U.S. Securities and Exchange Commission’s (SEC) requirements, which, while similar to the DOL’s standards, contain notable differences.
As of now, the DOL’s latest fiduciary rule and amendments to existing PTEs are on hold while two Texas courts determine whether to vacate the new provisions. Until these decisions are finalized, investment professionals must rely on older guidelines, specifically the 1975 five-part test established under the Employee Retirement Income Security Act (ERISA) and the Internal Revenue Code. This test defines what qualifies as fiduciary investment advice subject to the DOL’s enforcement.
To qualify as a fiduciary under the 1975 test, an investment professional must meet five criteria. First, the professional must provide advice to a retirement plan or IRA regarding the value of or the advisability of investing in securities or other property. Second, this advice must be given on a regular basis, not as a one-time recommendation. Third, the advice must be provided under a mutual agreement or arrangement between the advisor and the client. Fourth, the advice must serve as a primary basis for the client’s investment decisions concerning the retirement plan or IRA. Finally, the advice must be tailored to the specific needs of the client.
If all five conditions are met, the investment professional is deemed a fiduciary and cannot engage in activities that pose conflicts of interest. This includes situations where the advisor or their firm receives commissions or other compensation tied to the advice provided. In such cases, the fiduciary must operate under a PTE to ensure that their actions align with legal standards and protect the investor’s best interests.
Despite the current uncertainty surrounding the DOL’s fiduciary rules, several PTEs remain available to investment professionals, pending the Texas court rulings. Most ERISA fiduciaries look to PTE 2020-02, a widely recognized exemption whose conditions have been in effect since June 30, 2022. Although these conditions are familiar to industry professionals, the DOL’s reinterpretation of the “regular basis” element of the five-part test has introduced some controversy, particularly in the context of one-time rollover recommendations from ERISA retirement plans to IRAs.
In the preamble to PTE 2020-02, the DOL argued that even a one-time rollover recommendation could meet the “regular basis” requirement if the advisor expected to have an ongoing relationship with the client after the rollover. The DOL reasoned that the advisor would be providing advice on the same assets under the same fiduciary standards. This interpretation was reiterated in the DOL’s 2021 FAQs on meeting PTE 2020-02’s conditions.
However, in 2023, a Florida court ruling removed this interpretation. The court ruled that advice provided on ERISA plan assets could not be combined with advice on IRA assets to meet the “regular basis” test. As a result, unless there is an existing advisory relationship with the ERISA plan or participant, a recommendation to roll over plan assets to an IRA does not constitute fiduciary advice under the DOL’s current rules. Consequently, advisors are not required to comply with PTE 2020-02 for one-time rollover recommendations.
Meanwhile, the SEC has implemented its own set of rules for RIAs, brokers and other financial professionals, most notably the "Regulation Best Interest" (Reg. BI), which took effect on June 30, 2020. Reg BI is designed to create consistency in standards of conduct for brokers and RIAs in their dealings with retail investors, including retirement savers. RIAs have long been subject to fiduciary obligations under the Investment Advisers Act of 1940, and Reg BI reinforces these duties while holding brokers to a “best interest” standard when recommending securities-related transactions or strategies.
When providing recommendations to retirement savers, including rollovers, investment professionals subject to SEC rules must comply with the SEC’s requirements. If they are a fiduciary under the DOL’s definition and their compensation creates potential conflicts of interest, they also must comply with the conditions outlined in PTE 2020-02 (or another applicable PTE). While both the SEC and DOL aim to protect investors by requiring professionals to prioritize the client’s best interests, the two agencies’ standards differ in key ways. For instance, both require a thorough analysis of existing and recommended accounts to ensure that a rollover is in the client’s best interests. However, the SEC does not require brokers to assume fiduciary status or disclose the details of their rollover evaluation to clients.
Given this complex regulatory framework, investment professionals must work closely with their compliance departments to evaluate their business models and compensation structures. By doing so, they can determine which compliance obligations apply under SEC, DOL or state law, and ensure they are meeting the required standards of conduct when working with retirement savers.
Navigating the regulatory maze surrounding fiduciary responsibility is not just a legal necessity—it is also critical to maintaining trust with clients and safeguarding the long-term integrity of financial advice. Any misstep in adhering to the required standards, whether under SEC or DOL rules, can erode client trust and expose both the advisor and their firm to legal and financial risks. Moreover, this evolving regulatory landscape emphasizes the importance of transparency and clear communication with clients, ensuring they understand how rollover recommendations align with their best interests.
Staying informed about changes in the regulatory environment, as well as court rulings and potential revisions to fiduciary rules, is crucial for investment professionals. By remaining vigilant and adaptable, advisors can continue to offer sound, ethical advice while protecting both their clients and their reputations.
Lowell M. Smith Jr. is co-founder and chief compliance officer at IRALOGIX, a retirement industry fintech provider.