Morningstar launching 401(k) service for broker-dealers worried about DOL fiduciary risk

Because platform initially will be offered through B-Ds, firm doesn't see it undercutting plan advisers' business, though it has considered going direct to plan sponsors

Aug 8, 2016 @ 3:49 pm

By Greg Iacurci

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Morningstar Inc., the mutual fund research and ratings shop, is planning to launch a 401(k) service early next year for broker-dealers looking to minimize risk created by a Labor Department fiduciary regulation.

Many industry watchers have argued the DOL rule, which makes a fiduciary of anyone providing investment advice in retirement accounts, could push some advisers — especially those who are not retirement specialists — to abandon clients in order to mitigate liability.

Some broker-dealers may not even allow their advisers the option to serve as fiduciaries to retirement plans because of the risk.

Broker-dealers looking to minimize fiduciary liability in 401(k) plans have three choices once the DOL rule is implemented in April 2017, according to James Smith, vice president of retirement solutions at Morningstar: abandon 401(k) plans altogether, greatly expand their ranks of specialist advisers who can take on the plans ditched by generalists, or outsource 401(k) responsibility.

Morningstar's new service, an online platform called Morningstar Plan Advantage, will allow a broker-dealer to retain a 401(k) plan with which it's already doing business. An adviser would not be managing it, though — Morningstar would be handling record-keeper selection and provide plans with fund lineup design and management.

“Rather than monitor thousands of advisers, they're monitoring us,” Mr. Smith said of the broker-dealer firms that opt for the service.

Because the service will initially be offered through broker-dealers looking to mitigate risk, rather than marketed directly to plan sponsors, Mr. Smith doesn't see it as something that will undercut plan advisers' business. However, Morningstar has had internal discussions to make it a direct-to-plan-sponsor service, Mr. Smith said, but talks are inconclusive at this time.

(More: The most up-to-date information on the DOL fiduciary rule)

Anthony J. Domino Jr., managing principal at Associated Benefit Consultants, points out that a good 401(k) adviser adds more to a client relationship than just the record-keeper selection and investment management, through things such as plan enrollment, participant education and plan design.

Mr. Smith said plans, especially those in the small market with generalist advisers, typically work with a third-party administrator rather than their adviser to handle some of these functions, and Morningstar has built its model to accommodate this.

The firm hasn't yet decided on a service fee level, but says it will be a basis-point charge on assets and will be uniform among the various record keepers.

Morningstar is already one of the larger providers of outsourced fiduciary investment management services in the 401(k) market. Now, the firm will also help plan sponsors select a record keeper after assessing items such as a participant demographic profile and real-time pricing from record-keeping firms available over the platform.

Phase two of the service launch will involve determining how to do regular monitoring of record-keeper services, which Morningstar will work on likely through 2017, Mr. Smith said.

Fred Barstein, founder and chief executive of The Retirement Advisor University, believes “the opportunity Morningstar sees is very real.”

“I think that there's definitely going to be a void with the Department of Labor, where some advisers who under the new definition will be considered fiduciaries may not want to be fiduciaries,” he said.

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