Under certain provisions of ERISA, a person is a fiduciary if they have discretion over a retirement plan (“Plan”) or render investment advice to a Plan or Plan participant, beneficiary, or other Plan fiduciary. ERISA prohibits fiduciaries from engaging in various transactions, including transactions in which a fiduciary has a conflict of interest, unless an exemption exists. In 2020, the Department of Labor published Prohibited Transaction Exemption 2020-02 (“PTE”) as the most recent iteration of rules regarding retirement advice that have been proposed and replaced since 1975. The compliance deadline for the majority of the PTE’s provisions was February 1, 2022.
This document provides a brief overview of the PTE. For more information, please contact a member of our team.
II. Am I a Fiduciary Under ERISA?
Under Section 3(21)(A) of ERISA, a person is a fiduciary if they:
(i) have discretionary authority over management/disposition of a Plan;
(ii) render or have authority to render “investment advice” regarding a Plan for a fee or other compensation; or
(iii) have discretionary authority over administration of a Plan.
III. Am I Providing Investment Advice Under ERISA?
5-part Investment Advice Test
The PTE reinstates guidance from 1975 that established a 5-part test for determining when a person provides “investment advice” under ERISA Section 3(21)(A)(ii) above. A person provides investment advice if:
1. They render advice as to the value of Plan securities/property or the purchase/sale of Plan securities/property;
2. They render the advice on a regular basis;
3. They render the advice pursuant to a mutual agreement with the Plan or Plan fiduciary;
4. The advice serves as a primary basis for investment decisions with respect to plan assets; and
5. The advice is individualized to the plan.
The PTE also provides an official interpretation of the 5-part test, focusing particularly on rollovers to IRA accounts. 
The PTE reinstates Interpretive Bulletin 96-1, which excludes from the definition of “investment advice” the furnishing of educational information and materials, including the following:
- Information and materials about e.g.
- the benefits of Plan participation and increasing contributions;
- the impact of preretirement withdrawals on retirement income;
- the terms of the plan; or
- operation of the plan.
- Investment such as alternatives under a plan e.g.
- descriptions of investment objectives and philosophies, risk and return, historical return, and related prospectuses
General Financial and Investment Information
- Information and materials that inform a participant/beneficiary about:
- general financial and investment concepts;
- historic differences in rates of return between different asset classes based on standard market indices;
- effects of inflation;
- estimating future retirement income needs;
- determining investment time horizons; and
- risk tolerance assessments.
Asset Allocation Models
- Subject to certain conditions: information and materials that provide models of asset allocation portfolios of hypothetical individuals with different time horizons and risk profiles.
Interactive Investment Materials
- Subject to certain conditions: questionnaires, worksheets, software, and similar materials that provide a participant or beneficiary the means to estimate future retirement income needs and assess the impact of different asset allocations on retirement income.
IV. What Kinds of Conflicted Transactions Does the PTE Exempt?
The PTE provides an exemptions from ERISA provisions that prohibit fiduciaries from receiving compensation as a part of prohibited transaction.
ERISA generally prohibits a fiduciary from engaging in “prohibited transactions” involving conflicts of interest, including:
- dealing with a plan’s assets in the adviser’s own interest;
- receiving consideration from a third party dealing with the Plan; or
- causing the Plan to engage in a transaction involving a party in interest.
Therefore, under the PTE, an adviser may now receive compensation – including 12b-1 fees, trailing commissions, sales loads, mark-ups/downs, and revenue sharing – from transactions involving a Plan or Plan participant, even if the adviser has a conflict of interest in advising such transactions.
V. Conditions for Relying on the PTE 2020-02 Exemption
Advisers may receive compensation that is otherwise prohibited if they comply with the following conditions:
1. Compliance with “Impartial Conduct Standards”, including the following requirements:
- Adviser must:
- act in the best interest of the plan/investor;
- act with the care, skill, prudence, and diligence of a prudent person based on investor’s objectives, risk tolerance, financial circumstances, and needs; and
- not place their interests ahead of the investor’s interests.
- Adviser’s compensation must be reasonable; and
- Adviser must not make any not materially misleading statements.
2. Disclosures – adviser must provide in writing:
- Acknowledgment of fiduciary status;
- Description of the services to be provided;
- Material conflicts of interest; and
- Documentation of specific reasons for a rollover recommendation
3. Policies and procedures – adviser must:
- Maintain written policies and procedures designed to ensure compliance with Impartial Conduct Standards, mitigate conflicts of interest, and ensure documentation of specific reasons for recommending a rollover.
4. Conduct an annual retrospective review – adviser must:
- Conduct an annual review to ensure the adviser complies with, and detects and prevents violations of, the Impartial Conduct Standards and the adviser’s policies and procedures.
5. Maintain documents – adviser must:
- Maintain documents evidencing the adviser’s compliance for a period of six years.
What if I Violate the Conditions of the Exemption?
An adviser may avoid sanctions for engaging in a non-exempt prohibited transaction if:
1. The violation did not result in investment losses to the investor, or the adviser made the investor whole for any resulting losses;
2. The adviser corrects the violation within 90 days of learning of the violation;
3. The adviser notifies the Department of Labor within 30 days of correcting the violation; and
4. The adviser notifies persons conducting the adviser’s retrospective review of the violation.
Am I Eligible to Use the Exemption?
Although advisers are generally able to rely upon the exemption, the PTE is not available to:
- Advisers who are employers;
- Advisers who are named fiduciaries or administrators of a Plan, and are selected to provide advice by a fiduciary that is not independent;
- Providers of robo-advice; or
- Advisers acting as a fiduciary in another capacity.
VI. A Note on Principal Transactions
The PTE allows advisers to engage in the following principal transactions:
Riskless Principal Transactions
- Advisers may receive an order from a Plan/IRA to purchase/sell securities and subsequently purchase/sell the same securities for the adviser’s own account to offset the contemporaneous transaction with the Plan/IRA.
Covered Principal Transactions
- Advisers may:
- purchase any security or investment property from a Plan pursuant to a Plan’s order; and
- sell only specified securities to a Plan pursuant to a Plan’s order:
For more information, please contact a member of our Broker-Deal & Investment Advisors team.
 The Department of Labor provided the following interpretive statements on the 5-part test:
- Investment advice includes rollover advice provided as part of a relationship that is ongoing or is intended to be ongoing.
- Investment advice does not include the following: a single instance of advice to take a distribution or rollover assets; sporadic interactions with an investor; providing rollover assistance without the expectation of an ongoing relationship; or, one-time sales transactions.
- Advice only needs to be “a” (not “the”) primary basis of investment decisions. Further, advice only needs to be sufficient to determine the outcome of an investor’s decision, rather than the single most important determinative factor in the decision.
- Whether there is a mutual agreement that advice is a primary basis of an investment decision is based on the reasonable understanding of the parties. Written statements disclaiming a mutual understanding or primary basis are relevant but not determinative.