Morgan Stanley debuts fiduciary product for small 401(k) plans, with eye toward DOL rule

The wirehouse offers a way for non-fiduciary brokers working with 401(k) plans to continue working with clients in the small-plan market

Mar 9, 2017 @ 2:28 pm

By Greg Iacurci

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Morgan Stanley Wealth Management is making a push into the small 401(k) marketplace, debuting a fiduciary product exclusively available to its advisers and offering a risk-controlled way to continue servicing those plans when the Department of Labor's fiduciary rule comes into force.

The wirehouse partnered with Ascensus, a retirement plan record keeper, on the product, called ClearFit, available to 401(k) plans with less than $10 million in assets.

Ascensus will perform the plan record keeping and administration, while Morgan Stanley, which has an adviser force of more than 15,000, will offer a uniform lineup of investments for the 401(k) plans and assume a fiduciary role.

It's Morgan Stanley's first fiduciary product for the small and micro 401(k) market, and gives the brokerage a level of blanket protection for 401(k) business under the DOL fiduciary rule, which raises investment-advice standards in retirement accounts.

"This program allows every single one of our advisers … to act in a fiduciary advisory capacity with their clients," said Eric Garofalo, the firm's executive director of corporate retirement services.

Observers believe the DOL rule — which is coming into force April 10, but which may be delayed at least 60 days and eventually amended or rescinded — is going to have an outsized effect on advisers servicing small 401(k) plans.

Advisers servicing that market are often non-fiduciary brokers, whose investment advice would likely become fiduciary in nature under the rule, thereby exposing brokerage firms to more risk if they were to continue doing business the same way.

However, with ClearFit, because the Morgan Stanley organization takes responsibility for the investment fiduciary functions away from its advisers, the firm can mitigate risk while allowing its advisers to maintain or enter into new relationships with small-market clients.

The adviser could continue providing services such as non-fiduciary investment education.

"Whether the regulation moves forward or whether it doesn't, the concepts that are a part of that [DOL] regulation were very much considered as the product was built out," said Kathleen Connelly, executive vice president of client experience and relationship management at Ascensus.

Previously, only advisers Morgan Stanley designates as "retirement specialists" were able to enter into fiduciary advisory contracts with 401(k) clients. (The firm has roughly 300 designated specialists.) The remaining advisers engaged plans in a non-fiduciary, commission-based fashion.

Now, those non-specialists have three options when engaging retirement plan clients, said spokesman Christine Jockle: commission-based business; the ClearFit advisory approach; and a partnership with a retirement specialist, who would take on fiduciary responsibilities.

"Some of the broker-dealer firms are working with [the rule] that way to make sure they don't lose the business from the less experienced advisers, but at the same time they're protecting the firm and serving the interest of the client by having someone experienced actually work on the plan," said Bruce Ashton, a partner at Drinker Biddle & Reath.

Several record keepers offer plans and advisers the capability to outsource investment fiduciary functions to providers such as Mesirow Financial, Wilshire Associates, Morningstar Investment Management and Envestnet Retirement Solutions.

"Most have been, in my experience, investment advisory firms and not necessarily a broker-dealer, so in that sense [Morgan Stanley's] may be a little bit unique," Mr. Ashton said of outsourced fiduciary services.

They're typically used by small-market plans, because larger plans tend to engage their own fiduciary adviser, he added.

Morgan Stanley's role in its new product will be as a 3(38) investment fiduciary under the Employee Retirement Income Security Act of 1974, meaning it will take discretion to add or remove funds and subadvisers from the investment lineup.

The menu is comprised of 18 collective investment trust funds, some of which have multiple subadvisers, and a target-date asset allocation model that uses the collective funds on the menu. The unweighted investment cost for the fund menu is roughly 0.38%, Ms. Jockle said.

Ascensus charges a flat dollar fee for record keeping – the base fee, which accommodates the first 25 plan participants, is $3,950, and there's a per-participant fee for anyone additional, the cost of which is based on plan size.

There's also an annual benchmarking report delivered by Fiduciary Benchmarks to the plan adviser on an annual basis.

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