There are some potential developments retirement plan advisors should look out for in 2014, but not all of them are negative, according to Jason Frain, vice president of 401(k) product management and development and retirement solutions for Guardian Life Insurance Co. of America.
The big thing advisors are waiting on, Frain said, is what the definition of fiduciary will look like once the DOL and the SEC are done with it.
“That will have a far-reaching impact on the 401(k) market because the small and micro market, where Guardian does its business is driven by the advisor,” he said. “If the advisor’s role changes from a definitional standpoint, there obviously will be changes as to the roles or functions that an advisor can perform.”
Those changes may not be known until summertime, though, according to Frain and other experts.
The worst-case scenario for that definition is if the DOL decides to include advisors who recommend IRAs as fiduciaries. “The ramifications from that are farther reaching than just working with 401(k)s,” Frain cautioned. “It does have an indirect impact on 401(k)s in that a big part of the value that an advisor adds is educating the employees. If an advisor is constrained by what he can or cannot do — potentially talking to those employees and sitting down with them one on one, what recommendations they may or may not make on an investment basis — the more constraints you put on them, the less likely they are to try to provide that value.”
That’s dangerous considering the sorry state of retirement readiness today. “As we look at where employees are overall with their retirement savings, the last thing we need to be doing is to discourage education from advisors. There’s a lot more education that’s needed to 401(k) plan participants to ensure that they’re looking at their financial health and their retirement planning much more frequently and in depth than they’re doing today.”
Another potential business disturber is tax reform; however, Frain said we’re still a long way from knowing how that might affect retirement business. Whenever it happens, Frain stressed that proposals like the cap on tax-deferred status on balances above $3.4 million are misguided.
“We’re a long way from seeing any of those reforms pass — but overall it strikes me as ironic that we believe as a country that there’s an issue for Americans saving for retirement, but we try to limit their ability to save.”
Frain said the biggest losers could end up being the people furthest from retirement. “It’s going to put more of a burden on those individuals that are just starting out,” he said. “It’s more difficult already for a lot of folks starting out, say, in their 20s, coming out of college, they’ve gotten their first job. They’re not really putting anything away toward retirement because they may just be starting to get their feet under them from a financial standpoint, and now you’re going to make it harder for them to catch up as they get into their earning years.”
If reform leads employers to drop their retirement plans, that could be a big hindrance for young workers, too. Frain said employer-sponsored plans are a big benefit for workers because it makes it easy for them to “check a couple of boxes and be involved and enrolled and participate in the plan.” Without that launch pad into planning, many workers would have to take on the responsibility of not just funding their retirement but initiating planning as well.
“They may need to make more conscious decisions and spend more time and energy focuses on an overall retirement savings plan, which is not necessarily a bad thing, but as we’ve seen, that sort of interest and activity with retirement planning isn’t the norm for most individuals.”
Frain suggested a potentially positive change might be on the DOL’s radar. “The DOL is likely to look at the feasibility of open MEPs, multiple employer plans, and whether or not there are changes that could be made to regulations to allow open MEPs,” he said.