A booth at a Morningstar conference.

Beginning early next year, Morningstar will offer a way for broker-dealers to offload the fiduciary responsibility of managing 401(k) plans, which is mandated by the DOL rule that starts to take effect in April.

The Morningstar Plan Advantage will provide the investment management, fund lineup and recordkeeping (through a third party) for those defined contribution retirement plans.

“There are thousands of advisors who typically have one or two 401(k) plans,” explains James Smith, head of workplace strategy and business development at Morningstar.

These advisors are typically the generalists who manage workplace retirement plans with assets under $5 million or $10 million. They are not the retirement specialists that BDs would prefer to rely on to comply with the DOL fiduciary rule. “Small plans are not worth the time and effort for the specialist,” explains Smith.

But retirement specialists are just what broker-dealers and plan sponsors need now given the new DOL fiduciary rule and the growing number of lawsuits charging plan sponsors with excessive fees (at MIT, Yale and NYU among others) or self-dealing (Franklin Templeton, Neuberger Berman, American Century, New York Life).

Even closer to home for advisors is the class action lawsuit brought employees of CheckSmart who are charging that CheckSmart and Cetera Advisor Networks, as co-fiduciaries, allowed “grossly excessive” fees in a 401(k) plan whose investments performed poorly over a period of six years.

“What’s the best answer to a lawsuit?” asked Smith. “A prudent, independent nonbiased entity” managing the retirement plan … There is a huge amount of plans under $5 million or $10 million [in assets] that need someone to take on that responsibility.” 

Under the Plan Advantage program, Morningstar will gather basic plan information, then plan a specific fund lineup and monitor the funds on an ongoing basis, replacing poor performing funds if necessary. Plans will be able to choose among three different levels of complexity: a core program with five or seven fund choices; a complex program with 12 to 15 investment choices and one in between those two, with nine to 12 choices.

The broker-dealer would hire Morningstar, but “in the end the plan sponsor is our client,” says Smith. Morningstar may eventually offer the service directly to plan sponsors, but the current plan is to work through brokers. Morningstar has not yet determined its fees for the service, Smith said. Bill Chetney, founder of GRP Advisor Alliance, a retirement plan consulting firm, says there is demand for the Morningstar service, especially among 401(k) plans in the $1 million to $5 million marketplace.

“An advisor or nonspecialist with one to five [retirement] plans will not do all the things to be a true prudent fiduciary. The better solution is to offload the investment picking responsibility to a third party.”

Chetney expects much of the demand for the new Morningstar service will come from independent broker-dealers such as LPL, Commonwealth Financial Network and Cambridge Investment Research, which could mandate that their advisors use a third party to assume the fiduciary responsibility for defined contribution plans.

Large broker-dealers and wirehouses might also be potential clients.

They want only advisors with expertise in retirement issues to act as fiduciaries for 401(k) plans because of risk management issues for the corporation, says Chetney. “They don’t want to monitor whether a broker with three to five plans knows all the rules. ERISA is full of landmines.”

Attorney Jason Roberts, CEO of the Pension Resource Institute, a compliance consulting firm, says his large broker-dealer clients tend to manage retirement plans by teaming advisors who are not specialists in retirement plans with those who are. That way the management of those accounts remains within their firms.

He cautions that firms who use a third-party plan like Morningstar’s to manage retirement accounts are not necessarily offloading their fiduciary responsibilities. Although they would not be a fiduciary designing and overseeing a plan’s investment options, they could still be considered a fiduciary for simply recommending that Morningstar do that job.

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