Hundreds of Thousands of 401(k)s Up for Grabs After DOL Fiduciary Rule

If and when the U.S. Department of Labor’s fiduciary rule survives several legal challenges, the small and midsize 401(k) plan market stands to be revolutionized.

The rule requires all advisors to 401(k) plans with less than $50 million in assets to serve as fiduciaries. Under the Employee Retirement Income Security Act, all plan sponsors assume fiduciary obligations upon offering a defined contribution strategy, irrespective of plan size.

But those sponsors were not required to hire fiduciary advisors prior to finalization of the Labor Department’s rule.

Critics of the Labor Department’s rule have argued that requiring advisors to serve as fiduciaries to the small and midsize plan market will negatively affect access to 401(k) plans at a time when policymakers at the federal and state level are crafting and passing legislation intended to broaden access to retirement savings for employees of small employers.

Requiring all plan advisors to serve as fiduciaries will impose new regulatory costs and expose both advisors and sponsors to new liabilities, argue opponents of the Labor Department rule.

That will disincentivize advisors from servicing the massive segment of small and midsize plans, potentially motivate some existing sponsors to drop their plans, and discourage other small employers not offering a plan from doing so in the future, say the rule’s opponents.

The Labor Department and its advocates obviously disagree with that analysis. In imposing a fiduciary standard of care on all plan advisors, smaller sponsors will be relieved of liability, as advisors will be contractually obligated to serve plan participants’ best interests under the rule.

With fiduciary advisors at the helm, sponsors and participants will benefit from improved plan design and investment options with lower costs, as advisors will be prohibited from designing plans loaded with higher costing options that are not in a plan’s best interest.

How many plans will be affected?

At least one court will consider the potential impact of the Labor Department rule on the small and midsize plan market in determining whether the agency overstepped its statutory authority in crafting the rule.

The U.S. Chamber of Commerce, which has argued the rule will negatively impact small and midsized plans throughout the rulemaking process and after, is part of a consolidated lawsuit in the U.S. District Court for the Northern District of Texas.

If the rule survives legal challenges, the question will be how many 401(k) plans will be affected by the rule.

Consolidated data is hard to come by, according to several sources that consolidate data on the 401(k) market.

Recent data from Judy Diamond Associates, a provider of 401(k) analytic tools, shows there are about 481,000 plans with a median balance at or below $58 million in assets.

And there are nearly 469,000 plans with a median value at or below $5.2 million in assets, according to Judy Diamond, a business unit of ALM Media, the parent company of BenefitsPRO.

In 2015, analysts at Cerulli Associates set out to examine the impact of 401(k) specialist advisors on the 401(k) market.

Nearly half of the $1.3 trillion advisor-sold defined contribution market is controlled by what Cerulli calls “retirement specialists,” which the firm defines as advisors that generate at least half of their revenue from defined contribution retirement plans.

While their reach and influence on the 401(k) market is powerful, Cerulli says retirement plan specialists comprise only 5 percent of the total advisor population. Furthermore, within that small segment, 45 percent of those plan specialists do not offer services as an ERISA fiduciary.