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Report: New fiduciary rule will mean fewer DC plan "dabblers"

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Given the legal and compliance minefield advisors will to face under the Department of Labor’s conflict-of-interest rule, the question du jour is not whether advisors will exit the retirement space, but how many and (more to the point) which ones.

The short answer: Those who aren’t serious about building a fiduciary-compliant practice serving (mostly) defined contribution plan participants.

Cerulli Associates, a purveyor of research on asset management and distribution analytics, comes to this conclusion in a new report, “U.S. Defined Contribution Distribution 2016: Engaging the Boutique DC Consultant in the Mid-Sized DC Plan Market.” The survey explores the opportunities for defined contribution plan asset and revenue growth amid intensifying completion in the DC plan arena, and growing pressure on asset managers to reduce advisory fees.

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Advisors expected to head for the exits are, in Cerulli’s parlance, “dabblers” and “non-producers.” The research firm defines the first as advisors who derive from 15 to 49 percent of their business from retirement plans. Non-producers fall below the 15 percent threshold.

Cerulli foresees these advisors departing the DC plan arena in part because of the “additional work” needed to comply with the rule (e.g., signing a best interest contract, documenting services performed, and disclosing potential conflicts of interest). Many, too, will be unprepared to assume the legal liability of a new fiduciary standard.

To be sure, Cerulli does anticipate mass departures of advisors who don’t derive most of their revenue advising participants in employer-sponsored retirement plans.

“It is unrealistic to expect a full-scale exodus of dabblers and non-producers from the DC market… as retirement specialists comprise only 6.6 percent of the total [advisor force] and there are hundreds of thousands of small 401(k) plans,” the report states.

Because DC plan participants also enjoy institutional pricing not available in individual retirement accounts, Cerulli also believes that 401(k)-to-IRA rollovers will “be difficult to justify.” As a result, more assets will remain in 401(k)s and other employer-sponsored DC plans.

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Cerulli Associatres anticipates more partnering between fiduciary service providers and advisors who are unable (because of broker-dealer restrictions) or unwilling to serve in a fiduciary capacity. (Photo: Thinkstock)

Those retirement savers who do opt for a rollover will likely be interfacing more with providers of outsourced fiduciary services, such as Morningstar and Mesirow Financial. Cerulli anticipates these providers serving as fiduciaries for advisors who are unable (because of broker-dealer restrictions) or unwilling to serve in a fiduciary capacity.

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“The use of third-party investment advice fiduciaries means the role of the retirement specialist advisor must evolve from being primarily focused on investment selection to helping plans increase participant engagement and creating better retirement outcomes for employees,” the report states.

Cerulli’s forecast dovetails with the expectations of advisors polled for the survey. The asset managers interviewed foresee:

    • an increased demand for outsourced fiduciary services (63 percent);

    • fewer advisors working with employer-sponsored DC plans (59 percent);

    • more assets remaining within these DC plans (59 percent);

    • greater demand for ERISA 3(21) and/or ERISA 3(38) fiduciary services (63 percent of respondents). An ERISA 3(21) investment fiduciary provides investment recommendations to the DC plan sponsor/trustee. An ERISA 3(38) fiduciary selects and manages funds used in the plan.


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