Take-Away: An advisor’s recommendation to liquidate the investments in a 401(k) account, or to make a qualified plan-to-IRA rollover, is a securities recommendation according to the Department of Labor (DOL), the Securities Exchange Commission (SEC), and FINRA.

Background: The DOL, SEC, and FINRA are in alignment with their common view  that an investment advisor’s recommendation to roll over a qualified plan account is, in effect, a securities recommendation,  to liquidate investments held in a 401(k) account and rollover cash to an IRA. This is because 401(k) plans almost never transfer the plan’s investments to an IRA. In fact,  in a few situations, it would not be legally permissible to move plan investments to an ‘outside’ IRA. This then explains why the DOL, SEC, and FINRA all expect investment advisors to have information about the investments held in a qualified plan participant account. Restated, how can a ‘sell’ recommendation be made without knowing the investments that the sell recommendation covers?

DOL: In the Preamble to its PTE 2020-02, the DOL provided its view that:

“A recommendation to roll assets out of a Title I Plan is necessarily a recommendation to liquidate or transfer the plan’s property interest in the affected assets and the participant’s associated property interest in plan investments. Typically, the assets, fees, asset management structure, investment options, and investment service options all change with the decision to roll money out of a Title I Plan. Moreover, a distribution recommendation commonly involves either advice to change specific investments in the Title I Plan or to change fees and services directly affecting the return on those investments.”

A footnote to the PTE’s preamble also essentially says that the SEC and FINRA are on the same page:

“Similarly, the SEC and FINRA have each recognized that recommendations to roll over plan assets to an IRA will almost always involve a securities transaction. See Regulation Best Interest Release, 84 FR 33339; FINRA Regulatory Notice 13-45 Rollovers to Individual Retirement Accounts (December 2013.)”

Practical Perspective: A rollover recommendation made to a 401(k) participant is a ‘sell’ recommendation because few, if any, 401(k) plans distribute securities, other than perhaps company stock. How could a 401(k) plan distribute an institutional share class of a mutual fund to a retail IRA? Even small qualified plans which hold retail share classes of mutual funds (load waived) do not actually distribute shares in the mutual funds, but instead distribute cash to an IRA in a rollover transaction. Similarly, with regard to the “assets, fees, asset management structure, investment options and investment service options,” the DOL’s view is that those changes typically occur when money is distributed from a qualified plan to an IRA; this is a realistic perspective of a rollover, and it is also the same with regard to an IRA-to-IRA transfer.

Fiduciary Standard: The standards expected of investment advisors in these rollover transactions are similar to ERISA’s fiduciary standards of prudence and loyalty. Consequently, investment advisors will need to ensure that information about a participant’s plan investments are collected and evaluated as a part of a ‘compliant best interest process’ that is required of all fiduciaries.

Legal Challenges: Lawsuits are currently pending that challenge the DOL’s fiduciary interpretation in PTE 2020-02. However, even if those lawsuits succeed, which could limit the recommendations covered by PTE 2020-02, the SEC and FINRA’s rules will not be affected by the outcome of those lawsuits and, as such, they will continue to govern rollover recommendations.

Conclusion: The DOL, SEC and FINRA all hold the same view with regard to rollover recommendations, though the DOL seems to impose a more demanding requirement from investment advisors, e.g. the need for a written disclosure of why the rollover is in the best interest of the qualified plan participant. All three governmental regulators also view a rollover recommendation as a recommendation to sell investments held in a 401(k) participant’s account, which will lead to an investment advisor having to ensure that information about the participant’s plan investments is collected and evaluated in order to document that an informed best interest recommendation to sell those investments was made.