Keys to an Effective DOL PTE Retrospective Review

Your firm has developed procedures for complying with the DOL’s Prohibited Transaction Exemption (PTE 2020-02) and its rollover requirements – now what?

It is time to start thinking about the annual retrospective review requirement. To leverage the exemption that allows your firm to provide fiduciary investment advice to retirement investors, your firm must meet specific requirements, including conducting an annual retrospective review that is certified to by a member of senior management. Here are some keys to an effective retrospective review.

Assess your firm’s policies and procedures.

1. Are your policies and procedures reasonably designed to identify if your firm is acting as an investment advice fiduciary using the five-part analysis required by the DOL?
2. If the firm relies on educational material exemptions, are your procedures reasonably designed to assess whether educational content meets the four categories of the safe harbor?
3. Do your procedures require that fiduciary investment advice is based on the following?
   • The retirement investor’s investment objectives, risk tolerance and financial circumstances and needs
   • The security’s characteristics, features, liquidity, volatility and performance in different market conditions
   • The expected return, risks, costs and conflicts associated with the security or strategy
4. For rollover recommendations, are your procedures reasonably designed to ensure that the following factors are effectively considered?
   • Investment options
   • Fees and expenses
   • Services
   • Penalty-free withdrawals
   • Protection from creditors and judgements
   • Impact on required minimum distributions
   • Tax impact on employee stock held
5. Do your procedures require that diligent and prudent efforts are made to obtain information about existing employee benefit plans and the participants’ interests in it, and how a reasonable estimation of expenses and other factors can be made with publicly available information if a retirement investor will not or cannot provide information about their plan?
6. Do you have procedures reasonably designed to ensure that communications to retirement investors and plans are not misleading?
7. Do your procedures ensure that compensation is fair, based on (a) the nature of the service provided, (b) the market for such services, (c) the level of monitoring to be provided, and (d) the complexity of products to be provided?
8. Do your procedures ensure that required disclosures are made and made timely?
9. Do your procedures ensure that you document all of the required disclosures, that the documentation is maintained for a period of at least six years, and that they are available to authorized DOL and Department of the Treasury staff?
10. If you engage in principal transactions with retirement investors or plans, are your procedures reasonably designed to ensure that they are compliant with specific requirements related to principal transactions?
11. Do your procedures outline how the firm will address self-correcting situations where the exemption has been violated?

Test the implementation of your policies and procedures.

1. Conduct risk-based testing to ensure that the policies and procedures are being effectively implemented and that recommendations meet the impartial conduct standards.
2. Identify transactions that might have red flags for non-compliance (e.g., patterns of recommendations of higher cost alternatives, indications of failures to disclose or disclosures that are not timely, etc.).
3. Where risk-based sampling cannot be used, conduct effective and representative random sampling.
4. Walk through the lifecycle of a recommendation using actual transactions to make sure that policies and procedures are being followed.
5. Assess your associates’ understanding and familiarity of policies and procedures through interviewing and training.

Reduce the testing to a written report.

1. Describe the methodology and results of the review.
2. Maintain the report and supporting data for six years and be able to provide to the DOL within 10 days of the request.
3. Use the results of the review to find more effective ways to help ensure that investment professionals are providing investment advice in accordance with the Impartial Conduct Standards, and to correct any deficiencies in existing policies and procedures.
4. Ensure that Senior Executive Officer reviews and certified written report.

Oyster Consulting’s experts have the knowledge and experience necessary to efficiently conduct your DOL PTE required assessment, testing and documentation. Our industry professionals can also help you prepare your procedures and assess available tools and vendors. Leverage our resources to ensure your review and compliance program will stand up to regulatory scrutiny.