New US Department of Labor rules mean that many financial advisors are now defined as fiduciaries and will require a Prohibitive Transaction Exemption (PTE) in order to remain compliant.
A PTE allows Advisors to receive compensation for providing fiduciary investment advice on rolling over assets from an employer retirement plan such as a 401K to an IRA, or from IRA to IRA transfers.
Until now, most annuity advisors have not used Exemptions because they were not considered fiduciaries in the first place. However, a revised interpretation of the DOL’s 1975 regulation changes that basic understanding.
The definition of who is considered to be a “fiduciary” is now greatly expanded and many annuity transactions involving ERISA (Employee Retirement Income Security Act plans) and IRAs may trigger fiduciary status. Once defined as a fiduciary, annuity professionals will need the Exemption in order to receive compensation.
There is a 5-part test to define when recommendations rise to the level of fiduciary advice. All five parts or prongs of the test must be satisfied in order for an annuity professional to be considered a fiduciary.
- Render advice to the plan as to the value of securities or other property, or make recommendations as to the advisability of investing in, purchasing, or selling securities or other properties;
- on a regular basis;
- pursuant to a mutual agreement or understanding with the plan participant or IRA owner;
- that the advice will service as a primary basis for the investment decisions
- that the advice will be individualized, based on the particular needs of the plan or IRA.
The new interpretation of this 5-part test places most annuity producers that render advice to a plan, plan fiduciary, plan participant or IRA owner into fiduciary status.
Best Practices Checklist
✔ Gather the relevant information necessary to analyze the options available to the client. The Advisor needs to be familiar with all the nuts & bolts of the current plan.
✔ Analyze that information and other relevant factors in order to make a recommendation that is in the best interest of the client. Any advice should consider the rollover option in comparison to the current plan.
✔ Document the reasons why the recommendation for the rollover is beneficial to the client. Vital – maintain and retain all records!
✔ Comply with the conditions and requirements of a Prohibited Transaction Exemption (PTE). The key elements here are that any fees and commissions are ‘“reasonable”, that the Advisor’s relationship with the policy issuer and all details of the new policy are fully disclosed.
✔ Ultimately, the producer will need to complete the 84-24 disclosure form, which acknowledges the client’s receipt of the disclosures and approval of the transaction.
For more details carefully read the guide published by the National Association for Fixed Annuities and consult with Unkefer & Associates.