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Retirement Planning > Retirement Investing

DOL Fiduciary Rule Won’t Slow IRA Rollovers: Cerulli

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The pending fiduciary rule from the Department of Labor has led many firms to question whether there will be a slowdown in defined contribution distributions to individual retirement accounts.

However, according a Cerulli Associates report, the global analytics firm does not anticipate a slowdown in rollover activity in the foreseeable future.

The latest issue of The Cerulli Edge – Retirement Edition from Cerulli Associates explores the Department of Labor’s proposed fiduciary rule issued in April and possible implications it may have on future IRA rollovers.

Cerulli’s projection that the proposed rule will be implemented with only minor revisions in spring 2016.

“Cerulli does not anticipate a slowdown in rollover activity in the foreseeable future,” Bing Waldert, director at Cerulli, said in a statement. “First, even before the DOL announcement, broker-dealers with large advisor forces were adapting their businesses away from commission and proprietary products to fee-based, fiduciary business models. The industry may continue to see low-end consolidation of advisors and BDs not equipped to deal with sweeping regulatory changes, but firms of scale will continue their business with relatively little disruption.”

The reason for the concern is what Cerulli calls “one of the more contentious components of the proposal,” or its explicit coverage of advice regarding IRA assets. If the advice provider receives compensation that the DOL considers potentially influenced by a conflict of interest (such as commissions or revenue sharing), the provider must qualify for a prohibited transaction exemption.

Currently, under the Employee Retirement Income Security Act and the Internal Revenue Code, prohibited transaction exemptions are situation-specific and narrow in terms of what they cover.

The DOL’s proposal creates a new type of prohibited transaction exemption that is “broad, principles-based and adaptable to changing business practices” and is referred to as the best interest contract exemption.

“Some of the most publicized concerns center around the operational requirements to comply with the BICE, particularly as it relates to the disclosure of compensation,” the report states. “Firms of significant scale are likely best-equipped to deal with the BICE because they have the operational and technological resources to build enhanced supervisory infrastructure in a short period of time.”

Despite these changing regulations, Cerulli and Waldert see rollovers continuing without disruption for additional reasons. “[S]ome DC plans are not designed to accommodate partial withdrawals from separated or retired participants,” Waldert said in a statement. “Therefore, at retirement, it may be in an investor’s best interest to roll over their accumulated retirement balances to maintain maximum flexibility in retirement income planning. The current inflexibility regarding withdrawals in some DC plans for retired participants is one more reason Cerulli is optimistic about future rollover activity.”

As Jessica Sclafani, associate director at Cerulli, sees it, rollover activity won’t change until retirement income options change.

“Until retirement income options become more readily available inside DC plans, IRAs will continue to be the primary consolidation vehicle for retirees, regardless of an evolving regulatory environment,” she said.

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