Why you should do your Annual Retrospective Review now!
Happy new year!
I hope that 2025 is the best year you and your family ever experience.
As an ERISA Nerd, I am encouraging all my clients and investment adviser friends not to wait until the end of June to do your required Annual Retrospective Review.
And there is a specific reason why.
As you know (or should know), you need to complete a “Rollover” form that is compliant with Prohibited Transaction Exemption 2020-02 (PTE 2020-02) when you are an ERISA Fiduciary and you recommend a rollover to an IRA where you will earn more compensation than you are currently earning.
In general, you are an ERISA Fiduciary if you trade your clients 401(k) with discretion or if you charge your client for advice on how they should manage their 401(k).
For a more detailed explanation on “when” you are an ERISA Fiduciary and when you are not, check out our previous blog titled, “Am I an ERISA Fiduciary”.
Here’s an example of when you are an ERISA Fiduciary:
Assume you’re charging your client 75 bps per year to trade their 401(k) account every quarter. Your client switches jobs and asks you what to do with their money in their 401(k). You recommend they move their money into an IRA with your firm so you can manage their money for 1% per year.
In the above scenario, it would be “illegal” for you to accept that rollover and earn any compensation due to the “self-dealing” rules under ERISA law.
Now, the Department of Labor (DOL) knows that “in real life” (or IRL – like the kids say) your clients want to continue to work with you, even though moving that money is prohibited under the law.
So, the DOL has created a “legal” way for you to move the money into an IRA and get paid the additional compensation.
They call it a Prohibited Transaction Exemption or “PTE” for short.
So, as long as you follow the DOL’s exemptions to the “T”, you will be able to get paid for your “illegal” activity.
The last time the “Rollover” exemption was updated was in the year 2020 under the Trump administration. The DOL created PTE 2020-02 and spelled out exactly what is necessary for you to be “exempted” from the Self-Dealing Rules of ERISA law.
As part of the PTE 2020-02 rule your firm needs to have in writing (not should have, but needs to have) the following:
· Policies and Procedures designed to ensure compliance with the Impartial Conduct Standards of ERISA
o Duty of Prudence
o Duty of Loyalty
o Charge reasonable compensation
o Comply with “Best Execution” laws
o Make no misleading statements
· Acknowledge to your client you are operating as an ERISA Fiduciary under Title I of ERISA
· Conduct a prudent analysis and document
o Alternatives to the rollover
o A review of all investment options within the plan
o A comparison of the fees, expenses and services between the plan and recommended IRA
o Determine if the employer pays for any expenses or services
· Describe the services you will be providing
· Mitigate any conflicts of interest
· Disclose to your client any conflicts of interest that cannot be mitigated
· Document the reason(s) the rollover to an IRA is in the best interests of the client
All of this MUST be completed prior to completing the rollover to the IRA.
SIDENOTE: PTE 2020-02 is also needed when you recommend a client move an IRA to another IRA or if you change an IRA account from commission based to fee based (or vice versa). It’s not just needed when moving an ERISA account to an IRA.
If you work for a large RIA, wirehouse , broker/dealer or insurance company, your company should have provided you the required forms needed and training on how to complete the form and properly provide the required fiduciary acknowledgment and disclosures to your client.
Your firm should have policies and procedures in place in “approving” all your rollover, IRA to IRA business, etc. They should have made sure you followed all their requirements before the rollover was completed and your work should be done.
However, if any of your documentation is incomplete or if you have Chief Compliance Officer (CCO) duties for your firm, your work is not done yet.
You need to complete a particularly important step before June 30th.
You need to complete an Annual Retrospective Review of your policies, procedures and forms that were completed. You do not need to review every rollover from the previous year. You can review a sample of them, if the sample size is large enough to determine all the advisers in your firm have complied with your policies and you determine your policies comply with the requirements of PTE 2020-02.
You MUST (there’s that word again) create a file with the samples of all forms that were pulled, write down how you conducted the review and the results of your review. All the above needs to be condensed down into a written report that is presented to one of the most senior officers of your financial firm.
The senior officer must “certify” they reviewed the report and agreed with the findings, thus putting “their butt on the line” if it’s not done properly.
The report, the written certification and all the supporting documentation must be kept for a minimum of six years. At any point in time, the DOL could request all that information from any firm to ensure they are complying with PTE 2020-02.
You have 10 days to provide the DOL with the written report, certification and supporting documentation. If you do not provide this information to the DOL within 10 days, at worst, they can prevent you (or your entire organization) from doing any rollovers for the next 10 years!
So, it is especially important that every financial firm does their Annual Retrospective Review before June 30th each year.
But here is why it may be a great idea to do the review now.
If you find any violations of your policies during your review, the DOL allows you to correct them within 90 days.
And here is the kicker:
“If the violation did not result in investment losses to the retirement investor or the financial institution made the retirement investor whole for any resulting losses, the financial institution can correct the violation and notify the Department within 30 days of correction.”
If you find any violations, you need to ensure that your client either did not have any investment losses or you need to payback any investment losses before you report the violation to the DOL and add it to your Annual Retrospective Review.
You would much rather find any violation now, when the stock market is still high, versus later in the year, just in case the markets turn south.
You want to find any violations now before your clients may lose any money in the markets. Or you and your firm may have to pay your client back the losses.
And the DOL is on record that there are no “small” violations of their rules.
You need to comply with the whole PTE 2020-02 rule, or you are will be in violation of the “self-dealing” rules of ERISA.
So, just in case you need to correct any violations of your PTE reliance, you will want to do it before there might be any losses in your clients’ accounts.
Waiting to do your required Annual Retrospective Review until June could end up being very costly for some.
But hopefully not for any of my fellow ERISA Nerds!
Stay confident my friends!
SHAMELESS PLUG: If you need a refresher on PTE 2020-02 and sample forms, ADV language, Annual Retrospective Review verbiage, etc, check out our course for Chief Compliance Officers by CLICKING HERE.
This update has been written by Kevin T Clark, RF™.
Kevin is an “ERISA Nerd” and one of only a hundred(ish) Dalbar certified Registered Fiduciaries (RF™) in the United States.
Kevin T Clark, RF™ is the CEO and Co-founder of PlanConfidence Corporation.
All opinions expressed are those of the author and not that of PlanConfidence Corporation nor any other firm or individual.
PlanConfidence Corporation has created proprietary software to scale the research, advice, documentation and delivery of advice for RIA firms to their “held away” 401(k) accounts.
PlanConfidence ensures ERISA compliance through their proprietary software.
PlanConfidence Corporation is also an SEC registered “internet only” investment firm ensuring compliance with REG BI through their proprietary software.
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