New federal rules for advisors who give pension rollover advice

“Financial institutions must document the reasons that a rollover recommendation is in the best interest of the retirement investor and provide that documentation to the retirement investor," says WTW report.

(Photo: Shutterstock)

Regulations from the U.S. Department of Labor that expand liability for financial advisors who give pension rollover advice went into effect on July 1.

“While aspects of the rule were already in effect, now advisors must also provide the mandated written explanation to rollover clients of the specific reasons as to why the investment professional and/or financial institution believe that the rollover is in the client’s best interest or else face substantial potential liability,” according to a report from WTW. “This exposure is likely to trigger coverage under professional liability policies, as opposed to fiduciary liability policies that protect plan sponsors.”

The requirement that went into effect this month says “financial institutions must document the reasons that a rollover recommendation is in the best interest of the retirement investor and provide that documentation to the retirement investor. Financial institutions must adopt policies and procedures prudently designed to ensure compliance with the Impartial Conduct Standards and that mitigate conflicts of interest, and must conduct an annual retrospective review of compliance.”

Related: Pension unfunded liabilities rising with market volatility

Financial institutions and their employees or agents who advise clients concerning pension rollover decisions need to be fully aware of the many requirements of the Department of Labor’s Prohibited Transaction Exemption 2020-02 to prevent potentially substantial liability exposures, the report says.

In addition to exposure to investors and the Department of Labor from violations of the prohibited transaction rules, retirement investment advisors also can face exposure in connection with alleged excessive fees and/or underperformance that could follow from such rollover decisions. This is why it is vital that advisors have their processes, procedures and disclosures firmly in place. They also should consult experienced attorneys and ERISA benefits experts as needed to evaluate and compare the investments, services and expenses of each specific relevant retirement plan.

“The liability that advisors could face pursuant to these rules would not implicate fiduciary liability policies, which only cover plan sponsors, plans and their employees in relation to fiduciary breaches,” the report concludes. “Coverage for these exposures ought to be available under relevant professional liability policies as long as they don’t have overly broad ERISA or fiduciary liability exclusions. Any such exclusions should be limited to work performed for the client’s own plans.”