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Half of IRA Rollovers to Stay in Plan After DOL Fiduciary Rule: Cerulli

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Hundreds of billions of dollars of 401(k) assets that would otherwise have been rolled over to IRAs will stay in plan upon implementation of the Department of Labor’s fiduciary rule, according to a projection from Cerulli Associates.

The rule, which service providers and advisors will have to be fully compliant with come January 1, 2018, makes any advice to roll assets over to an IRA a fiduciary recommendation subject to the Best Interest Contract Exemption.

Advisors will be expected to document why the recommendation to roll assets out of an employer-sponsored plan, where investors may benefit from cheaper institutional shares of investments, to an IRA with more expensive retail shares of investments, is in an investor’s best interest.

While industry consensus has been that the $7.3 billion IRA market will absorb much of the rule’s impact on industry, other factors, like the inability of many 401(k) plans to provide drawdown strategies to supply retirement income, will assure a continued migration of some retirement savings to IRAs.

The question of how much will migrate will largely depend on advisors’ ability and willingness to recommend a rollover.

According to Cerulli, the decision to roll over assets is most impacted by the advice investors receive from financial professionals. Nearly 30 percent of respondents surveyed by the firm said that advice was the primary determinant to move assets out of plan—more than any other influence.

(Related: Milevsky on DOL Fiduciary Rule: Big Flaws; Annuities Will Suffer)

But respondents also cited other reasons that advisors may use to rationalize a rollover recommendation.

Almost 29 percent of respondents said they rolled over assets because they had an existing IRA, suggesting a preference to have their savings consolidated.

And another 27 percent said they did so because their 401(k) plan had limited investment options.

Advisors that have relied on rollover business are not expected to completely abandon marketing the option, but Cerulli’s research, published in the report U.S. Evolution of the Retirement Investor 2016: Regulation and Investor Addressability, suggests advisors will have to offer more services to clients to support a rollover recommendation.

Cerulli expects existing advisor relationships to continue to capture most rollovers. Plan participants with an existing advisor relationship have higher average 401(k) account balances than accounts rolled over to a new advisor relationship or a self-directed IRA, explained Jessica Sclafani, associate director and head of retirement research at Boston-based Cerulli.

Sclafani said that in many cases, rolling assets over will clearly be in investors’ best interests.

“Defined contribution plans today are not designed to be income platforms for investors so it may, in fact, be in their best interest to rollover assets to an IRA,” she said in an email.

One potential consequence of the DOL rule could be the wider adoption of in-plan annuity offerings by plan sponsors, which would further influence more participants to leave assets in their 401(k) plan, said Sclafani.

Service providers that offer rollover services in accord with 401(k) platforms will also have to reexamine how they market and provide rollover advice, says Cerulli.

Aggressive marketing tactics, like cash offerings to incentivize rollovers, will likely not be worth the compliance risk after the rule is implemented, said Sclafani, further influencing more assets to stay in plan. Cerulli’s research shows that 8 percent of participants said they relied on advice from service providers to roll over assets.

“Recordkeepers are among the largest IRA providers,” she said. “They’re going to have to soften their messaging. That, coupled with more support for plan-to-plan rollovers when participants change employers, will also influence more assets to stay in plan.”

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