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Will the DOL fiduciary rule kill 401(k) plan referrals?

The regulation may not cause a flood of new referrals as non-specialists exit the 401(k) market. It might actually have the opposite effect

Mar 15, 2017 @ 5:56 pm

By Fred Barstein

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Experienced defined contribution plan advisers are excited about the potential flood of referrals from less-experienced plan advisers not interested in acting as a 401(k) plan fiduciary when the DOL fiduciary rule kicks in.

Many less-experienced plan advisers are expected to refer current or potential 401(k) clients to more experienced plan advisers, but there's a catch. The referral may be considered a fiduciary act and questions of whether compensation for those referrals is reasonable will also arise, regardless of the DOL rule, which will make a fiduciary of anyone providing investment advice for a fee in retirement accounts.

So what does the future really hold for referrals of DC plans to advisers?

The best way for experienced plan advisers to get new clients is via referrals from other professionals like accountants, third party administrators, attorneys, bankers, employee benefits brokers, wholesalers from DC service providers such as record keepers, and other advisers.

Many plan advisers diligently work their own broker-dealer and RIA network to partner with advisers not focused on 401(k) or 403(b) plans. The non-specialists often work with retirement plans in order to win wealth management business from employees of the plan sponsor, or because they want to be compensated for the adviser referral. That fee can be as high as 50% of the adviser revenue, but 20% is more typical, ending after three to five years. Flat-fee payments are starting to emerge.

It's a common and established process that is gaining momentum as many less experienced plan advisers have no interest in taking on fiduciary liability under the new DOL rule, a sentiment that their broker-dealer or registered investment adviser supports.

But experts are claiming that referring another adviser to a DC plan sponsor can be a fiduciary act, especially if just one adviser is recommended. The same problem is true for other referring sources, especially wholesalers at record keepers and asset managers, who routinely refer clients to experienced plan advisers. Even if there is no compensation generated from the referral, the potential quid pro quo from the referred advisers is enough to raise issues that providers will not want to touch.

A solution for providers or other third parties is to refer a plan sponsor to a broker-dealer or RIA who, through a documented, prudent process, then suggests potential advisers in their network who have the necessary qualifications and are well-suited for the plan and participants.

But how many networks have that process in place today or even have the requisite knowledge to create a prudent process? Advisers and providers can certainly refer the plan sponsor looking for a new adviser to an independent third party such as InHub, which conducts adviser requests for proposals. But doesn't that mitigate the benefit for the referring party?

Beyond the fact that an adviser referral may be a fiduciary act under the new DOL rule, which may be delayed beyond its original April implementation date, there's the problem of compensation. For example, no matter the source of an adviser referral, would the referral fees be reasonable if a third party that isn't servicing the retirement plan or adding value is getting paid? One-time referral fees may be less problematic, depending on the size of the fee and whether it makes the adviser's compensation higher than normal.

So, the DOL rule may not cause a flood of new referrals as emerging advisers exit the DC market. It might actually have the opposite effect.

Fred Barstein is the founder and CEO of The Retirement Advisor University and The Plan Sponsor University. He is also a contributing editor for InvestmentNews' Retirement Plan Adviser newsletter.

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