Retirement account rollover recommendations remain a top focus of the Securities and Exchange Commission (“SEC”) and Department of Labor (“DOL”) examinations. While many advisers associate PTE 2020-02 with 401(k)-to-IRA rollovers, its application is broader and extends to many recommendations involving retirement assets where the adviser receives compensation.
For RIAs, compliance requires more than documenting why a rollover is beneficial. Firms should have a consistent process that demonstrates recommendations are made solely in the retirement investor’s best interest and are supported by thorough documentation.
Which Retirement Plans Are Covered?
Understanding which accounts fall within the scope of PTE 2020-02 is critical.
ERISA-Covered Plans
The exemption generally applies to recommendations involving assets held in private-sector retirement plans subject to ERISA, including:
- 401(k) plans
- Profit-sharing plans
- Defined benefit pension plans
- Money purchase pension plans
- Employee Stock Ownership Plans (ESOPs)
- ERISA-covered 403(b) plans sponsored by private employers
Non-ERISA Retirement Plans
Although the following plans are generally not subject to ERISA, recommendations involving these accounts may still implicate the Internal Revenue Code’s prohibited transaction provisions when compensation is received. Examples include:
- Traditional IRAs
- Roth IRAs
- SEP IRAs
- SIMPLE IRAs
- Governmental 457(b) plans
- Governmental 403(b) plans
- Certain church plans
Accordingly, advisers should not assume that a recommendation falls outside PTE 2020-02 simply because the retirement account is not governed by ERISA.
When Does PTE 2020-02 Apply?
PTE 2020-02 allows investment professionals who are fiduciaries under ERISA or the Internal Revenue Code to receive compensation that might otherwise be prohibited, provided specific conditions are met.
The exemption commonly applies when advisers recommend:
- Rolling assets from an employer-sponsored retirement plan into an advisory IRA;
- Transferring retirement assets to an advisory account that generates new advisory fees;
- Moving retirement assets from a commission-based account to a fee-based advisory account; and or
- Transferring retirement assets into accounts managed by the adviser’s firm.
Key Compliance Requirements
Firms relying on PTE 2020-02 should:
- Acknowledge fiduciary status when required;
- Comply with the DOL’s Impartial Conduct Standards by acting in the client’s best interest, exercising prudent professional judgment, avoiding misleading statements, and charging no more than reasonable compensation;
- Document why the recommendation is in the client’s best interest;
- Maintain written policies and procedures designed to identify and mitigate conflicts of interest; and
- Conduct and document an annual retrospective compliance review of compliance with the exemption and prepare a written report certified by a senior executive officer.
The rollover analysis should compare the client’s existing retirement account with the proposed account, considering factors such as fees, investment options, services, distribution flexibility, creditor protections, employer-paid benefits, and other plan features. Generic statements such as “more investment flexibility” or “professional management” are unlikely to satisfy regulatory expectations without client-specific support such as the current plan does not offer estate planning, or insurance services.
SEC Expectations
Although the SEC does not administer PTE 2020-02, its fiduciary expectations closely mirror the DOL’s. Advisers should evaluate whether both the rollover and the recommended account are in the client’s best interest by considering costs, services, investment options, account features, withdrawal flexibility, and other relevant factors.
Just as importantly, advisers should document the basis for every recommendation. During examinations, documentation is often the firm’s strongest evidence that a fiduciary analysis was performed.
Best Practices
To strengthen compliance, firms should:
- Standardize rollover analyses using a consistent questionnaire or checklist.
- Require advisers to provide meaningful, client-specific narratives supporting each recommendation.
- Review compensation arrangements for potential conflicts and ensure appropriate mitigation.
- Retain supporting documentation, including fee comparisons, plan disclosures, client meeting notes, and rollover analysis worksheets.
- Provide annual training on PTE 2020-02 requirements, documentation expectations, and common examination findings.
Takeaway
While the SEC and DOL regulate under different authorities, their expectations are aligned. Advisers should act in the client’s best interest, carefully evaluate available alternatives, manage conflicts of interest, and maintain documentation that demonstrates the basis for every recommendation. Firms with standardized procedures, strong supervisory oversight, and thorough documentation will be better positioned during regulatory examinations.
The Core Compliance team has extensive experience with, and knowledge of, the various compliance and regulatory requirements that investment advisers and broker-dealers should take into consideration. If you have any questions about this or any other aspects of your compliance program, please reach out to our team at info@corecls.com or give us a call at 619-278-0020.
Author: Apryl Thompson, Compliance Consultant; Editor: Matthew Rothchild, Sr. Compliance Consultant, Core Compliance & Legal Services (“Core Compliance”). Core Compliance works extensively with investment advisers, broker-dealers, investment companies, and private fund managers on regulatory compliance issues.
This article is for information purposes and does not contain or convey legal or tax advice. The information herein should not be relied upon regarding any particular facts or circumstances without first consulting with a lawyer and/or tax professional.
