DOL fiduciary rule to turn plan advisors into fiduciaries ‘overnight’
December 22, 2015 by Nick Thornton
The Department of Labor’s proposed fiduciary rule will make thousands of non-registered defined contribution plan advisors fiduciaries “over night,” say analysts at Cerulli Associates.
But if the finalized version of the complex rule resembles its proposed form, it is not expected to stem the tide of 401(k) rollovers to IRAs in the coming years, claim the analysts.
When the DOL unveiled its proposal last April, it built its case for the new rule’s necessity largely on the argument that IRA owners often receive conflicted advice, amounting to billion is losses to savers a year.
The more than $2 trillion expected to rollover from 401(k) plans in the coming years underscores the need for a uniform fiduciary standard for all advisors, argue proponents of the DOL’s proposal.
As is, 45 percent of retirement plans specialists do not operate as a fiduciary to plans.
That will change, says Cerulli.
Fiduciary services as defined in the Employee Retirement Income Security Act “will become a pivotal offering necessary to remain relevant in the defined contribution market,” according to a new study of the DOL’s rule’s consequence on retirement provider and investor markets.
Cerulli’s data shows that 37 percent plan specialists operate as 3(21) fiduciaries, which means they advise plan sponsors but do not have full discretion over how plan assets are invested.
And 13 percent now serve as 3(38) fiduciaries, meaning they assume full discretion and responsibility for investing plan assets, leaving sponsors with the fiduciary responsibility to monitor the services provided.
Only 5 percent serve as 3(16) fiduciaries, which means they supply full plan administration services along with discretion over plan investments.
Demand for all three will clearly rise if the DOL’s rule is finalized, turning many plan advisors into fiduciaries “overnight,” and likely forcing many of those advisors with limited defined contribution business out of the market.
While complying with the rule’s new prohibited transaction exemptions will carry “monetary and personal costs” for advisors and firms, the rule is not expected to slow 401(k) rollovers, contrary to some speculation, says Cerulli.
One reason is that many large broker dealers have already begun transitioning from commission-based compensation models to fee-based models.
Broker-dealer firms of scale will continue to operate in the IRA market with “relatively little disruption,” Cerulli’s report says.
Furthermore, comprehensive drawdown strategies are not standard in 401(k) plans, leaving retiring workers with little choice but the roll assets into an IRA.
“The current inflexibility regarding withdrawals in some DC plans for retired participants is one more reason Cerulli is optimistic about future rollover activity,” said Bing Waldert, a director at Cerulli, in a statement.
Cerulli’s report suggests that absence of retirement income options like annuities in 401(k) plans will also encourage retirees to rollover assets into 401(k) plans, regardless of the regulatory environment.
Only one-fifth of large 401(k) pans offer retirement income solutions, according to Cerulli.
“While interest and willingness to discuss in-plan retirement income products are growing, obstacles remain to more widespread adoption,” says Cerulli.
