PTE 2020-02 Compliance: Avoiding Five Common Mistakes

It may be a New Year, but 2022 is going to seem very familiar to Broker-Dealers (BD) and their Registered Representatives who advise retirement plans and IRAs: they are going to be spending a lot of time working to comply with new exemptions and new ERISA rules coming from the Department of Labor (DOL). As some of these deadlines are right around the corner, in this post we’re going to review the five most common pitfalls and problems we’ve seen clients face, and how to better address them in disclosures and policies and procedures.

So what’s ahead this year regarding fiduciary advice and exemptions? First, DOL is working on a new proposed definition of ERISA fiduciary investment advice to replace the 1975 regulation, and could publish the new proposal for comments this spring. This proposal may also include changes to DOL’s new Prohibited Transaction Exemption 2020-02 (the PTE). If DOL succeeds in rewriting these rules, they likely will go into effect in 2023. That means the current rule and the current version of the PTE will likely remain in effect for the next 12-18 months.

Which brings us to the second, and most urgent issue—BD’s and their representatives must meet most of the conditions of PTE 2020-02 by February 1, 2022. These include the written acknowledgments of fiduciary status by both the BD and the representative, disclosure of conflicts and compensation information, the implementation of policies and procedures to mitigate or eliminate conflicts, and annual reporting and certification of compliance. The rest of the PTE’s conditions, those relating to documenting and disclosing specific information regarding rollover recommendations, goes into effect on July 1, 2022.

As we’ve worked with clients the past six months to prepare for the PTE, we’ve noticed some common trouble spots. Here are five of the most common mistakes, and how disclosures and policies can be improved to comply with the PTE.

  1. DOL Warning Regarding Implied Recommendations

    The PTE provides prohibited transaction relief for conflicts of interest arising from nondiscretionary fiduciary advice, including advice to roll over or transfer assets from a plan or IRA. However, to avoid having to rely on the PTE and its many conditions, some firms have decided to provide only education regarding rollovers—in this scenario, they would advise or manage IRAs after a rollover, but not make a recommendation regarding the rollover itself. While this can be a valid strategy, firms need to be aware that the DOL has cast a jaundiced eye on what it views as implied recommendations, suggesting that advisors “gaming the system” by trying to avoid the “magic words” of a recommendation “[are] unlikely to be successful.”1 DOL’s point appears to be that an advisor could meet the 1975 regulation’s five-part test, even if she avoids saying “I recommend you roll over to our IRA,” if the clear implication of the communication was suggesting that the participant should engage in the rollover. Firms should examine their policies and procedures regarding education services and compensation to persons providing educational information to ensure that information is presented in an objective manner with no implied recommendations of a strategy or actual investments.

  2. Failing to Recognize that Rollovers Include IRA-to-IRA Transfers and More

    The DOL interprets “rollover” very broadly to include a rollover from a plan to an IRA, from a plan to a plan, from an IRA to a plan, from an IRA to an IRA, or a change of account types for a plan or an IRA (e.g., from commission-based to fee-based). We are noticing that the disclosures and policies and procedures developed by some firms refer only to plan to IRA rollovers. This is concerning because the PTE is also needed for conflicted advice regarding these other “rollover” transactions. Therefore, we recommend that firms review and revise, as needed, their disclosures and policies and procedures to include all relevant rollover transactions.

  3. Failing to Recognize the Breadth of the Terms “Plan” and “IRA”

    The PTE provides relief for prohibited transactions involving “plans” and “IRAs”. Both terms are broadly defined. The term “plan” covers ERISA plans (including ERISA-covered 403(b) plans), tax-qualified annuity plans under Internal Revenue Code (Code) Section 403(a), and tax-qualified plans under Code Section 401(a) including solo 401(k) plans, but it does not cover governmental plans or church plans (unless the church plan has elected to be subject to the Code Section 401(a) rules). The term “IRA” covers Individual Retirement Accounts, Individual Retirement Annuities, Archer Medical Savings Accounts, Health Savings Accounts and Coverdell Education Savings Accounts. Firms need to ensure that their policies cover or exclude these additional types of accounts as needed for their particular lines of business (for example, not apply to governmental 403(b) plans, or do apply to HSAs.)

  4. Using a Deficient Fiduciary Acknowledgement

    One of the conditions of the PTE is that prior to engaging in the transaction, the firm and the advisor must provide the retirement investor with a written acknowledgement of fiduciary status under ERISA and/or the Code. We are noticing that some firms have developed a disclosure for ERISA plan participants that acknowledges ERISA fiduciary status but that does not also acknowledge fiduciary status under the Code. These disclosures should be corrected to include acknowledgement of fiduciary status under both the Code and ERISA. The DOL has provided model language to satisfy this PTE condition and firms may want to consider that language in developing the disclosure.

  5. Failing to Assess Reasonableness of Compensation

    The PTE requires that the compensation received by the firm and investment professional not exceed reasonable compensation. The DOL applies a market-based standard, meaning that the firm needs to consider whether the compensation reflects the value of services as determined by the competitive marketplace. Firms may use benchmarking services to assist with this evaluation. Also, the fees paid to the firm and investment professional need to be considered in determining whether the recommendation is in the retirement investor’s best interest. Firms need to ensure that these requirements are reflected in their PTE compliance process.


Firms should keep these issues in mind when reviewing their disclosures and policies and procedures. There is still time to take action and modify them as needed to address these deficiencies, and we would be happy to review your existing policies at your convenience.

1 “DOL Official Sheds Light on Rollover Recommendations,” NAPA-Net Daily, July 28, 2021, available at

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