DOL fiduciary rule could cause half of potential IRA rollover assets to stay put: Report

More money expected to remain in employer-sponsored retirement plans instead of flowing into individual retirement accounts, Cerulli finds

Sep 8, 2016 @ 1:39 pm

By Liz Skinner

Advisory firms banking on attracting loads of new assets from baby boomers rolling over 401(k) plans into individual retirement accounts may need to come up with a new plan for boosting AUM.

The new Labor Department rule mandating that retirement advice be in the best interests of clients stands to impact almost half of the money that had been projected to end up in retail IRAs, according to Cerulli Associates research released Thursday.

The increased scrutiny and complexity that the DOL rule adds on those who recommend clients move out of employer-sponsored defined contribution plans into IRAs will “potentially disrupt future flows,” the researchers said in the report.

(More: Do retainers beat AUM-based fees under fiduciary rule?)

They predict advisers who rely on IRA business will focus on offering the accounts only to larger account holders, thus smaller accounts will likely remain in the DC plans.

“There is a general consensus in the retirement industry that more assets will remain in employer-sponsored DC plans because of the rule,” said Jessica Sclafani, associate director at Boston-based Cerulli.

Cerulli “generally agrees,” and using a proprietary model it projects that “nearly half” of the assets previously expected to land in retail IRAs are “at risk,” and more people likely will keep their accounts invested in work plans, the report said.

Today's $7.3 trillion IRA market is the fastest growing segment of the retirement business.

(More: Coverage of the DOL rule from every angle)

The top two reasons retirement plan participants give for why they rolled their funds from 401(k) plans into an IRA are advice from a financial professional (29.4%) and to consolidate those dollars into an existing IRA (28.6%), according to Cerulli.

Many who have an existing relationship with an adviser will likely still rollover to IRAs and not be discouraged by additional disclosures they'll need to sign, the researchers said. Also, the accounts that move because of their relationships with existing advisers tend to have a higher account balance compared to rollovers that are self-directed or come through a new adviser relationship.

Under the controversial DOL rule, which is to be implemented by April 2017, advisers must be able to demonstrate they're acting in the best interests of their clients when providing advice tied to retirement accounts.

The large DC plan providers that also offer IRAs, such as Fidelity and Vanguard, may see fewer assets landing in their IRAs following implementation of the rule, too.

Those providers will likely need to reassess their more aggressive marketing tactics, such as offering cash for rollovers, the report said. Such an incentive “may be deemed inappropriate and not worth the potential risk under the new regime,” researchers said.

About 8% of plan participants said they rely on the advice of their 401(k) provider, and 1% said they are influenced by communications from their IRA provider, the Cerulli report said.

Employer-provided plans also may retain more assets in the future if they begin to offer more features that clients need and want. For instance, the researchers expect DC plans to evolve to increasingly become income platforms for investors.

Factors considered in decision to roll over to an IRA
Cerulli Associates, The Cerulli Report - U.S. Evolution of the Retirement Investor 2016

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