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Reality Sets In: How New Fiduciary Rule Impacts 401k/IRA Providers and Retirement Savers

Reality Sets In: How New Fiduciary Rule Impacts 401k/IRA Providers and Retirement Savers
September 27
00:02 2016

With the dust finally beginning to settle and nothing short of a Trump administration possibly left to stand in the way of implementation, many industry leaders expect the DOL’s new Conflict-of-Interest (a.k.a. “Fiduciary”) Rule to be one of the biggest game-changers in recent history. It has the potential to reset the entire industry – or at least major portions of it. In addition, it’s already had the impact of opening consumers’ eyes in a way no other previous effort has been able to do. Yet, for all the earth shaking doom and gloom we constantly read about, it may come as a shock to you how much will stay that same and how little, in some cases, changes will need to occur.

For many, especially those already leading with the fiduciary mantle, the new Rule also offers new opportunities. This could add considerable value to retirement savers impacted by the Rule. For all the disquiet associated with changing providers, they may end up in a far better situation than when they started, according to those practitioners who responded to our interview queries.

The New Fiduciary Rule and Its Impact from a Client’s Perspective

The Conflict-of-Interest Rule directly impacts two customer constituencies. Although the onus falls primarily on service providers, the duties (and potential liabilities) of corporate retirement plan sponsors will no doubt increase. The new Rule makes it much more difficult for service providers to obfuscate, whether intentionally or not. While many have pointed to this as a major burden to the service provider, it actually increases the fiduciary liability of the plan sponsor, who now must conduct a more thorough due diligence than previously allowed. Are plan sponsors prepared for this?

James Carlson, Chief Investment Officer at Questis, Inc. in Charleston, South Carolina, says, “Many of them are not familiar with the details of the Rule, but they understand the general idea. It validates their decision to outsource fiduciary functions. Plan sponsors looking to make a change now have an additional forcing function that will cause action within the plan committee.” The question then becomes whether plan sponsors will merely go through the motions or will they take advantage of this occasion to delve deeper into the process.

“We think many plan sponsors will be surprised to learn that their current plan advisor isn’t a fiduciary, and many will be surprised to learn that their account will be transferred to someone else within the advisory firm who is or is willing to become a fiduciary,” says Trisha Brambley, CEO of Retirement Playbook, Inc. in New Hope, Pennsylvania. “We believe this will cause many plan sponsors to take a more active role in screening and selecting a plan adviser that truly fits their needs, rather than passively going with whoever is assigned to them. The pay-off for active selection is huge: best all-around fiduciary protection, potentially better resources and intel for the plan sponsor, better outcomes for the participant, competitive plan adviser fees and fulfillment of the plan sponsor’s fiduciary responsibility to check on the reasonableness of ALL plan related fees. If you don’t know your options, you don’t have any.”

For individual retirement savers, the calculus is quite different. For one thing, they don’t have responsibility for other peoples’ money, just their own. Whereas failure to pay attention can get a plan sponsor in trouble relatively quickly (and with severe penalties, too), a similar failure on the part of an individual for their own account will only lead to heartache much later on. It doesn’t matter if it’s a worse heartache, it’s still a heartache that’s years away, so “there’s plenty of time to correct for it.”

With or without the regulator’s heavy hand, the material fallout of the Rule will remain negligible for individuals short of a concentrated marketing effort. Carlson says, “At a personal investor level, I think the rule will largely be ignored, as personal investors are not inclined to monitor DOL activity. If anything, they might appreciate the additional attention related to the fees associated with their IRAs.”

The New Fiduciary Rule and Its Impact on Existing Relationships

It’s becoming clearer the negative repercussions of the new Rule, for the most part, will focus on very specific business models. Other business models, on the other hand, stand to benefit from the new Rule as the pendulum swings the other way. Because his firm has already adopted the fiduciary service model, Carlson says, “The rule will not affect our investment operations in a significant way. The burden of complying with the rule will be with more traditional, conflicted advisors and their broker-dealer partners.”

The last major change in retirement plan reporting – the 2012 Mutual Fund Fee Rule – saw unexpected consequences. For example, by requiring for the first time participants to see the portion of fees they were responsible for paying created some confusion. Even service providers who had always been open about their fees (with the plan sponsor) and who were not involved in any self-dealing (i.e., transaction-oriented) conflict-of-interest were accused (by participants) of charging participants a fee for services that were previously “free.”

It is clear any time reporting formats change, even when there are no other material changes, can lead to confusion. The new Fiduciary Rule will likely require different reporting and disclosures for providers not currently offering fiduciary services (since all service providers will now be deemed to be fiduciaries). This can certainly jeopardize some existing plan sponsor relationships, but it definitely impact all future IRA rollovers. “The new rule will require an increased focus on what kind of information is provided to someone who is contemplating moving from a 401(k) to an IRA account,” says Carlson.

The New Fiduciary Rule and Its Impact on New Relationships

It is here where we expect to witness the greatest opportunities among business models with prior fiduciary experience. “The rule bolsters the value proposition of an independent consultant to plan sponsors and firms willing to take fiduciary responsibility as an ERISA 3(38),” says Carlson. “The rule just deepens the data that more and more plan sponsors are leaving broker-dealers to do business with independent RIAs.”

For firms involved in vetting service providers, the new Rule creates much broader marketing prospects. Brambley says, “We will be marketing our services to sponsors who want to undertake a robust due diligence search for a plan adviser AND also to those plan sponsors who simply want to know how their incumbent adviser stacks up against an array of other plan advisers via a comparative study of the value and services offered in today’s marketplace.”

It remains evident the first changes we’ll see are likely to occur within the corporate retirement plan arena. Less apparent is what might happen in the IRA market. Again, for firms already familiar with fiduciary services, the expectation is that things are more likely to remain the same. For example, Carlson says the new Rule “will not affect our marketing or sales activities for IRA business.”

The Timing of These Impacts

The DOL’s Conflict-of-Interest Rule still needs to pass several hurdles prior to formal implementation. The consensus appears neither court action nor Congressional action will be enough to hold up the Rule. On the other hand, though unthinkable only weeks ago, the increasingly likelihood of a Trump administration may present the biggest obstacle to implementation of the Rule. While not yet on the official record regarding the new Rule, Trump has made rolling back regulations one of his top campaign promises. With the Rule months short of implementation as of Inauguration Day, it would appear to be a prime candidate to be among the first Obama regulations to be revoked.

Even if a President Trump rescinds the DOL’s Conflict-of-Interest Rule, the spirit of the Rule may live on. A study of the impact of the new Rule shows the marketing advantage for firms offering the fiduciary services required by the Rule. Already, in advance of implementation, some firms have started marketing campaigns emphasizing the fiduciary nature of their service. The only question will be if the momentum of those campaigns can be sustained without the formal regulatory teeth.

Are you interested in discovering more about issues confronting 401k fiduciaries? If you buy Mr. Carosa’s book 401(k) Fiduciary Solutions, you’ll have at your fingertips a valuable reference covering the wide spectrum of How-To’s every 401k plan sponsor and service provider wants and needs to know.

Mr. Carosa is available for keynote speaking engagements, especially in venues located in the Northeast, MidAtantic and Midwestern regions of the United States and in the Toronto region of Canada. His new book Hey! What’s My Number? – How to Increase the Odds You Will Retire in Comfort is available from your favorite bookstore.

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Christopher Carosa, CTFA

Christopher Carosa, CTFA


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