Morgan Stanley eliminating commissions, finder's fees in 401(k) plans

The stance differs from Morgan's position on IRA commissions, but observers say it's not surprising given the difference between the 401(k) and retail retirement markets

Mar 24, 2017 @ 5:38 pm

By Greg Iacurci

Morgan Stanley Wealth Management is eliminating commission payments and finder's fees for its advisers servicing 401(k) plans, shifting entirely to a level compensation arrangement based on plan assets, according to a source with knowledge of the firm's decision.

Implementation of the policy will be complete over the next few weeks, the source said.

Morgan Stanley and other brokerage firms have been moving to level compensation structures in their 401(k) and retail-retirement platforms over the past several months due to the Department of Labor fiduciary rule, issued last spring.

The rule raises investment-advice standards in retirement accounts, and in many cases makes it riskier for firms to receive variable forms of compensation such as commissions and 12b-1 fees. The rule's implementation period is set to begin April 10, but may be delayed by at least 60 days.

Merrill Lynch Wealth Management recently announced it will be shifting to a level-fee 401(k) arrangement for advisers, and will also do so in the majority of circumstances in individual retirement accounts.

Morgan Stanley announced in October it would allow its advisers to continue receiving IRA commissions, which is in contrast to how it will be handling 401(k) plans.

"[401(k)] is a very different animal," said Jason Roberts, CEO of the Pension Resource Institute, an ERISA compliance consulting firm. "I don't know that we can read anything into a firm's position relative to IRAs because it's a very different type of service."

Advisers serving smaller retirement plans today often receive finder's fees from record-keeping firms for recommending their respective platforms, Mr. Roberts said.

As an example, a provider may pay a 1% upfront commission to the adviser based on plan assets, a trailing 50-basis-point fee on new participant deposits into the plan for the two years following implementation, and a level 25-basis-point trail afterward, Mr. Roberts said.

Such finder's fees wouldn't necessarily be considered investment advice under the DOL regulation, but many brokerage firms are taking precautionary measures, he added.

"They're just not that convinced those recommendations won't have some degree of investment advice intertwined in the platform recommendation," Mr. Roberts said.

The leveling of compensation also relates to the investment recommendations advisers make for 401(k) investment menus, which may pay advisers varying levels of commissions and 12b-1 fees.

"What a lot of people are looking for is in some way to sanitize [compensation] so that the financial person's incentive for the customer to make a specific investment choice rather than a different investment choice becomes minimized," Andrew Oringer, partner at Dechert, said.

Many advisers serving plans in a non-fiduciary capacity today may already be receiving level compensation based on how some of the prominent record-keeping firms have structured their platforms, Mr. Roberts said.


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