PTE 2020-02 Misses a Major Point

I’m consternated. For anyone who reads my normal weekly content, this may or may not be for you. This is more of a complaint or concern than an educational piece, but it’s one I feel a need to voice. This year, “Prohibited Transaction Exemption” or “PTE 2020-02” was released, giving guidance to financial planners and advisors about how they needed to handle rollover and transfer recommendations from 401(k) plans, IRAs, and other retirement plans. The essential gist of a PTE is that the act of recommending a rollover of any kind is a prohibited transaction that could result in compensation to the person making the recommendation is defaulted to being prohibited and therefore illegal; therefore, the PTE provides an exemption from that illegality, stipulating that such a recommendation is permitted if certain criteria were met. Complying with the PTE requires that firms document the reasoning and rationale behind their rollover recommendations and provide a justification for the recommendation, including factors such as cost, services, creditor protection considerations, and other extenuating circumstances that make it in the best interest that the client perform the rollover.

Complying with the PTE is a burdensome amount of paperwork (our disclosure document is 12 pages long), but it makes some form of sense to ensure that there’s a valid explanation to a client of the reasons for the recommendation and the disclosure of the conflict of interest that comes with getting paid to make the recommendation. The paperwork is not why I’m consternated. No, let me explain a very specific reason.

Most people will not work for a single employer in their lifetime. Forty to fifty working years on average is a long time to stick with any one organization. Thus, it is not uncommon or unusual for people to change jobs and employers every few years, and in some cases, even every few months. Each employer can have their own benefits package, including a retirement plan. Some will be auto-enrolled and instantly eligible 401(k) plans, some will have restrictive vesting schedules and disincentivize participation by employees, and others will be more unusual and arcane forms such as SIMPLE IRA plans, 403(b) plans, and so on. A phenomenon that I cannot begin to count the number of times I’ve observed, can be summed up with an anecdotal example: A client in their 60s is getting ready to retire, and as we perform a financial planning analysis, they tell us about their career. “Oh, I had a job with a Union shop back in Omaha Nebraska for a few years back in the 80s.” They’ll say. “Did you have a retirement plan?” I’ll ask. “Oh yeah, I think we had a pension or something.” They’ll reply. And thus begins the nightmare: Because regulations permit and even now encourage employees to leave their retirement plans behind at old employers, they can create a decades-long goose chase to track down the old employer. That sounds somewhat simple, but think about what can happen over years or decades: The company fails, is bought out, merged, split, acquired, spun off, and that’s just what can happen to the business, not counting what can happen to the employees of those companies with years and decades of staff turnover. Something as simple as tracking down an old 401(k) from “a few years ago” can turn into days, weeks, months, or even years-long struggle.

Then we have the inverse issue: When the employer doesn’t know about the employee’s status. Another real-world example that has consumed hours of my week: A client company shut down their old 401(k) plan years ago. Participants, including current and ex-employees at the time, had a limited time to rollover their funds to a new plan or out to an IRA. Notifications were sent out to addresses of record, and little else was to be considered at that point. Fast forward to the present, and one ex-employee still hasn’t transferred their assets out, which needs to be done by the end of July for regulatory reasons. So we go hunting for the employee: turns out, she passed away last year. Tragic, unexpected, sad. But of course, no one told the employer (because why would they, she hadn’t worked there in years) and in turn, no one told the old 401(k) plan recordkeeper. So with this knowledge, we have to pull up beneficiary designations. We find the beneficiary’s information and try to track him down. Phone? Disconnected. Email? Bounces. Message on LinkedIn? Unopened. Finally, a phone call to the company on this person’s Linkedin page, to see if we can catch him in the office. “He doesn’t work here anymore.” Says the receptionist. “Okay, can we get a phone number or perhaps a mailing address?” “Let me send you to HR.” After a brief interlude, assuming that HR has to get involved because the receptionist doesn’t want to risk giving away ex-employee information (and good on her for protecting herself), we get in touch with HR. The real reason we’ve been sent to HR? “He died last week.” To sum it up, we now not only have a years-dead ex-employee, but a recently dead beneficiary, and now we have to try to track down an estate’s executor. Did I mention we have until the end of July to get this money out or the client’s new 401(k) plan implodes?

So what’s the problem with PTE 2020-02? It actively disincentivizes, and de-facto prohibits, a recommendation to take a retirement plan with you. It doesn’t make it impossible to do, and nothing prevents a savvy individual from doing it themselves. But what it does do, is put an uncomfortable barrier between any well-meaning financial planner and their client, to recommend the client carry their retirement assets with them. Perhaps after a job change, their new employer plan is worse than their old one. Well, you can’t very well recommend they put it in the new plan. So then you can try to make your best bid to recommend a rollover to an IRA. But what if the old plan is so amazing that you can’t justify it? Or worse, you think you can but a regulator later on disagrees, and you end up slapped with fines and penalties? The default setting that the money should stay put makes sense from a conflicts of interest mitigation standpoint, but it fundamentally puts an obstacle in the way of planners or advisors attempting to recommend participants carry their retirement with them to avoid the risk of losing it or having it get mixed up, or even worse, complicated for their family and heirs in the future should something unfortunate occur.

So that’s it. That’s why I’m consternated. Because a generally good piece of advice, that people should take their retirement with them wherever they go, is now something I and other planners are required to justify, validate, and otherwise risk regulatory and civil penalties for advising on if we can’t sufficiently please the whims of a regulator at some hitherto unknown point in the future. Is it a big problem? No. Is it world ending and shattering? No. But I’ve spent a good chunk of my time this week tracking down a dead person, and then tracking down their dead beneficiary, to track down that person’s grief-stricken relatives. I’ve had countless conversations with retirement plan recordkeepers and old employers trying to find money that is rightfully a client’s, now lost solely to the predations of the simple passage of time.

So the takeaway for you, random reader? Take your retirement money with you as you go through your career. I don’t have to complete a 12 page disclosure document if I tell you that “in general” and “for education purposes.”

Editor’s Note: In my haste to vent my frustration at this issue, I typoed the PTE in question, PTE 2020-02 as 2022-02; thi shas been amended in the title and content, but remains in the URL for linking purposes.