On DOL Fiduciary

DOL fiduciary rule will cause retirement plan advisers to outsource liability

Outsourcing will help reduce or eliminate fiduciary liability when building plan lineups

Mar 20, 2016 @ 12:01 am

By Greg Iacurci

Outsourced investment advisory services for 401(k) plans stand to reap the benefits of the Labor Department's proposed rule to raise investment advice standards in retirement accounts.

The rule would make fiduciaries of any 401(k) adviser giving investment advice, and advisers who take on more liability by constructing and monitoring a plan's investment lineup as a result of the regulation may look to offload some of that risk.

“Post-DOL, I imagine [outsourced services] will become even more popular,” said Anthony Domino Jr., managing principal at Associated Benefit Consultants.

FUND RECOMMENDATIONS

The services in question are referred to as 3(21) and 3(38) fiduciary investment services, as defined by the Employee Retirement Income Security Act of 1974. A 3(21) fiduciary adviser serves as a co-fiduciary, making fund recommendations for a 401(k) lineup but giving plan sponsors ultimate discretion to implement changes. With 3(38), advisers take on even more fiduciary liability, because they have full discretion to implement changes.

Retirement plan advisers can outsource such responsibility to firms such as Morningstar Inc., Mesirow Financial Holdings Inc. and Wilshire Associates Inc., some of the most prominent players, to reduce or eliminate fiduciary liability when building plan lineups.

(More: Recent class-action surge ups the ante for 401(k) advice)

RISK TRANSFER

“There's going to be more risk to transfer, and there's a tremendous opportunity [for advisers] to transfer that risk to these big companies,” Mr. Domino said.

Here's how the outsourced services generally work: The providers contract with record-keeping firms, which then offer the services to all defined contribution plans on their platform. Under the 3(21) service, outsourced providers screen the funds available over a record keeper's platform, and narrow those down to a handful of funds in certain asset categories that advisers and plan sponsors can then use to build a final 401(k) lineup. In the 3(38) offering, the providers — not the plan adviser or employer — choose the ultimate combination of funds.

These services have grown more popular over the last several years. Morningstar, for example, now advises on $29 billion in DC assets through more than 12,000 plans, up from $10.3 billion and 2,300 plans in 2009.

The growth is due to several factors, such as working with more record keepers and advantageous market performance, as well as more demand created by heightened fiduciary awareness, according to Jim Licato, senior product manager for fiduciary services at Morningstar.

Industry watchers expect even more uptake if the DOL rule becomes final, in part because these outsourced services tend to be used mostly in the small and micro 401(k) market.

“There's definitely going to be heightened liability in serving [401(k)] plans, especially smaller plans,” said Scott Cooley, Morningstar's director of policy research. (Of course, he added, this depends on the text of the final rule, which is likely to come out this month or early April.)

The small-market niche is the one in which the non-retirement-specialist advisers and brokers tend to operate. Indeed, non-fiduciary brokers are the traditional users of Mesirow's service, according to Vincent Vicidomini, the company's vice president of business development. (Mesirow advises on nearly $40 billion in more than 20,000 DC plans through its outsourced offering.)

These brokers arguably will be hardest hit by the DOL rule, which would hold them to the more-stringent fiduciary standard rather than the current suitability standard.

“Just raising the bar on that standard may make advisers reach out and say we need an extra level of care, a fiduciary level of care,” said Brooks Herman, head of data and research at BrightScope Inc. “One avenue to do that is through these 3(21), 3(38) providers.”

Furthermore, 401(k) specialist advisers may come down-market to fill the hole left by advisers who exit the small 401(k) market post-DOL rule, and using an outsourced product could help them scale their practice efficiently, Mr. Vicidomini said.

(Related fiduciary read: Congress poised for its last stand against DOL rule)

NOT A 'PANACEA'

Jason Roberts, chief executive of the Pension Resource Institute, also believes that third-party services will gain more popularity, but cautions that while these offerings can limit fiduciary responsibility for advisers at the plan level, advisers could still be exposed at the participant level.

“So it's maybe not the panacea people may be led to believe,” Mr. Roberts said. Advisers making investment recommendations to participants would be held to a fiduciary standard, he added.

Financial planning discussions around such topics as helping participants understand retirement goals, their gaps in getting there and the level of deferrals needed to help close those gaps would not constitute a fiduciary act under the proposed rule, Mr. Roberts said.

0
Comments

What do you think?

View comments

Recommended for you

Upcoming Event

Oct 23

Conference

Women Adviser Summit - San Francisco

The InvestmentNews Women Adviser Summit, a one-day workshop now held in four cities due to popular demand, is uniquely designed for the sophisticated female adviser who wants to take her personal and professional self to the next level.... Learn more

Featured video

Events

InvestmentNews celebrates diversity & inclusion in the financial advice business

Highlights of the Excellence in D&I Awards, showcasing the achievements of 26 individuals and firms that are moving the needle when it comes to diversity and inclusion.

Latest news & opinion

Don't be fooled by the numbers — the industry is in a dangerously vulnerable state

Last year's stock market gains helped advisers turn in solid growth in assets and revenue, but that growth could disappear in the next market downturn.

Divided we stand: How financial advisers view President Trump

InvestmentNews poll finds 49.2% approve of his performance, while 46.7% disapprove. How has that changed over the course of his presidency?

10 states with the most college student debt

Residents of these states have the most student debt when you consider their job opportunities.

Ex-Wells Fargo brokers sue for damages, claiming they lost business in wake of scandals

In a Finra arbitration complaint, two brokers allege that Wells Fargo's problems damaged their business.

Invesco to buy OppenheimerFunds

Deal brings Invesco another $246 billion in assets, as well as high-fee actively managed funds.

X

Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting investmentnews.com? It'll help us continue to serve you.

Yes, show me how to whitelist investmentnews.com

Ad blocker detected. Please whitelist us or give premium a try.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print