With the Labor Department's fiduciary rule upping the ante for many 401(k) advisers and their broker-dealers, providers from around the retirement market are looking at ways to defray fiduciary responsibility, and in some cases, possibly replace the adviser altogether.
Many industry observers expect that the Department of Labor rule, which raises standards for providing investment advice in retirement accounts, will cause broker-dealers to choose one of three options: severely restrict the number of advisers who can service 401(k) plans, exit the 401(k) market entirely, or seek out ways to mitigate risk by outsourcing.
These actions would largely affect small 401(k) plans, many of which are serviced today by brokers working in a non-fiduciary capacity.
Within the past few weeks, Massachusetts Mutual Life Insurance Co., a record keeper of defined contribution plans, and Mercer, a consulting firm, have launched programs that seek to provide relief for both investment and administrative responsibility in 401(k) plans.
In August, Morningstar Inc. announced a new service, Morningstar Plan Advantage, geared toward broker-dealers that would help them retain current retirement-plan business, but mitigate much of the risk created by the fiduciary rule.
LPL Financial, the nation's largest independent broker-dealer, has a service similar to the MassMutual and Mercer programs, which would mitigate its advisers' risk on the investment side of 401(k) plans. Announced in late 2015, the service has been adopted by record keepers such as Nationwide, Ascensus and Paychex, Inc., within the past few months.
“Everyone's looking at this opportunity. Where there's a vacuum, something comes in to fill that vacuum,” Fred Barstein, founder and chief executive of The Retirement Advisor University, said. “And there is going to be a void, no question. How big it is, it won't happen all at once. But it will happen.”
In its new service, called Fiduciary Assure, MassMutual is partnering with Envestnet Retirement Solutions to offer a 3(38) investment fiduciary service, as defined by the Employee Retirement Income Security Act of 1974. These types of programs are discretionary, in which registered investment advisers take control of a plan's investment menu, choosing funds and making changes as they see fit.
MassMutual is also offering a 3(21) service, a co-fiduciary role in which an adviser recommends funds and the plan sponsor ultimately decides whether to implement the advice.
Mercer's new service, Mercer Wise 401(k), packages together a 3(38) investment service with a fiduciary service covering a plan's administrative functions, known as a 3(16) fiduciary. In that role, Mercer will select and monitor a plan record keeper, and file required documentation such as the annual Form 5500.
Mercer was once a player in the U.S. DC record-keeping market, but sold its business to Aegon, the parent company of Transamerica Retirement Solutions, last year.
Part of LPL's offering also includes a 3(38) service.
Industry observers anticipated these outsourced services would become more popular with advisers as well as plan sponsors, some of which may lose their adviser if that adviser quits the business due to the fiduciary rule.
The services also come at a time when 401(k) litigation is becoming more prominent, with plaintiffs alleging plan sponsors breached their fiduciary obligations to the plan.
While the nature of the services aren't new to the industry, it seems providers are now adding or re-focusing such capabilities as a way to capitalize on the perceived demand.
“Part of the thinking is the landscape is going to change, and it will change in many ways,” Tom Murphy, senior partner at Mercer, said, acknowledging one effect is that some advisers may exit the fiduciary market because of the DOL rule. “If that's the case, we're happy to step in and manage the plans in a fiduciary way.”
Some retirement plan specialist advisers, the majority of whose business comes from DC plans and who are accustomed to serving as fiduciaries, see the shake-up as an opportunity.
Aaron Pottichen, principal and retirement services practice leader at CLS Partners, said there may be increased opportunity for advisers to serve as a 3(38) fiduciary in the small-plan and start-up markets, for example.
As opposed to advising on the whole 401(k) plan, which typically doesn't pay a fee commensurate to the amount of work necessary for a start-up plan, advisers can more easily forecast the amount of time that will be spent on any one client when providing a 3(38) service and can add value for a worthwhile pay day, he said.
“I think our biggest competitor in that space won't be other advisers, it'll be record keepers,” Mr. Pottichen said, explaining that their economies of scale may allow providers to come to market with a very low price.
As an example, MassMutual's 3(38) and 3(21) is free-of-charge for the firm's record-keeping clients with less than $5 million in plan assets, and 2 basis points for those with more than $5 million.