DOL Regulations Expand Liability for Financial Advisors Giving Pension Rollover Advice

The U.S. Department of Labor (DOL) began fully enforcing its Prohibited Transaction Exemption 2020-02 as of July 1, 2022. These regulations apply to and expand liability for financial advisors giving clients pension rollover advice. Some aspects of the rule were already in effect. Still, advisors must now provide clients with a mandatory written explanation of why the investment professional or financial institution believes the rollover is in the client’s best interest.

Financial institutions must adopt policies and procedures to ensure compliance with the Impartial Conduct Standards and mitigate conflicts of interest. The Impartial Conduct Standards require that financial advisors:

  • Give advice that is in the best interests of the retirement investor, or that is prudent and puts the interests of the investor first;
  • Charge no more than reasonable compensation and comply with federal securities laws concerning best execution; and
  • Make no misleading statements.

Financial institutions also must conduct an annual retrospective review of compliance with these standards.

Failure to provide this explicit information in writing can result in substantial liability and likely will trigger coverage under professional liability policies, not fiduciary liability policies. Generally speaking, fiduciary liability policies concern fiduciary breaches and cover only plans, plan sponsors, and their employees. As long as professional liability policies have no overly broad ERISA or fiduciary liability exclusions, those policies should provide adequate coverage.

Additionally, investment advisors could face exposure related to excessive fees and underperformance that could stem from rollover decisions. These risks underscore why advisors and the financial institutions they represent must have their policies and procedures, in this regard, firmly in place and religiously follow them.

HBL has experience in all areas of benefits and employment law, offering a comprehensive solution to all your business benefits and HR/employment needs. We help ensure you are in compliance with the complex requirements of ERISA and the IRS code, as well as those laws that impact you and your employees. Together, we reduce your exposure to potential legal or financial penalties. Learn more by calling 470-571-1007.

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