DOL fiduciary rule will trim 401(k) advisers’ stable of record keepers, asset managers: study

Advisers to defined contribution plans will likely trim the number of record-keeping firms and asset managers they regularly use for DC business because of the Department of Labor fiduciary rule, mainly with an eye to cutting costs, according to a new study by Sway Research.
Forty percent of retirement/benefits consultants and 43% of retirement advisers believe the regulations will lead to a decline in the number of record keepers they use, according to the report, “The State of DCIO Distribution: 2017.”
In addition, 26% of retirement/benefits consultants and 35% of retirement advisers believe the rules, which raise investment-advice standards in retirement accounts, will lead to a similar result among asset managers serving DC plans.
Retirement/benefits consultants are employer-benefits specialists receiving around 80% of their revenue from DC plans, while retirement advisers are wirehouse and independent-broker-dealer advisers deriving around half of their revenue from DC plans.
“We’re in a place now where it’s sort of a race to the bottom [in fees],” said Chris Brown, the founder and principal of Sway Research, an asset management distribution research shop. “It’s not just investment management, but record keeping too.”
The DOL fiduciary rule has only heightened the fee sensitivity plan advisers and employers have felt because of litigation targeting cost in defined contribution plans, which has increased in frequency and branched to broader areas of the DC market within the past year, Mr. Brown said.
Plan intermediaries have expressed that the push toward lower-fee products and importance of cost when competing for business will likely push them to concentrate more business among those asset managers focused on passive management, or those active managers whose funds are more inexpensive than peers.
More than seven in 10 plan intermediaries expect to increase passively managed assets in the plans they sell and service, according to the report. That comes on top of a steadily growing appetite for index funds within the past 10 years — passive assets have grown to roughly 30% of the 401(k) market this year from 17% a decade ago.
“A lot of the advisers like active management, but they feel in order to win business right now they need to move more passive because they’re competing on fees,” Mr. Brown said. “They’re sort of peeling back some of the firms that aren’t as low-cost.”
Advisers may also turn away from record keepers whose platforms, rather than being open-architecture, mainly offer actively managed, proprietary funds, Mr. Brown said. Also, those platforms that don’t offer many zero-revenue-share funds could be in trouble, as advisers are likely to increase adoption of funds without 12b-1 fees as a way to comply with the DOL rule.
“It’s going to be hard going forward, I think, for advisers to justify doing business with a 12b-1 fee,” Mr. Brown said.
Sway surveyed 57 retirement/benefits consultants and 67 retirement advisers for the report who managed an aggregate $554 million in DC assets.