Merrill adds to 401(k) fiduciary services

Wirehouse will allow more advisers to manage retirement plan menus on a discretionary basis via a Bank of America chief investment office selection

Mar 25, 2019 @ 2:13 pm

By Greg Iacurci

Merrill is expanding its roster of fiduciary services available to 401(k) clients, a move that comes amid a broader push by wirehouses and large brokerage firms to change the way they work with smaller retirement plans.

Merrill announced Monday it would manage 401(k) plans' investment menus on a discretionary basis. Under the arrangement, a plan sponsor gives Bank of America's chief investment office permission to manage the 401(k) investments without input from the client.

The offering is known technically as a 3(38) fiduciary service, in reference to a particular section of the Employee Retirement Income Security Act.

Large brokerage firms such as Merrill began expanding their suite of fiduciary 401(k) services shortly before the Department of Labor fiduciary rule went into partial effect in June 2017. The regulation, which was ultimately killed in court, would have raised investment-advice standards in retirement accounts, requiring brokers working with 401(k) plans to give advice in clients' best interests.

Brokerages have begun to recognize that taking on fiduciary liability could be a competitive advantage, said Andrew Oringer, co-chair of the employee benefits and executive compensation group at Dechert.

"Some are surgically choosing to go down that road," Mr. Oringer said.

Providing such services allows brokerage firms better control of risk among the population of 401(k) advisers known as generalists, or inexperienced 401(k) advisers, who typically work with small retirement plans, according to experts. Many services to date — such as Merrill's new 3(38) service — put the decision-making into the hands of the home office rather than the adviser.

It's also another revenue opportunity for brokerage firms, according to experts, since they charge a fee for taking on fiduciary liability.

Ladenburg Thalmann Asset Management Inc., LPL Financial, Morgan Stanley Wealth Management, Raymond James and UBS Wealth Management Americas are examples of brokerage firms to have debuted similar services. Cetera Financial Group is looking to roll out a program this year.

In March 2017, Merrill first announced plans to significantly expand its fiduciary services by allowing a greater number of its roughly 15,000 advisers to serve as a 3(21) co-fiduciary under ERISA. That means the adviser makes investment recommendations to a 401(k) plan sponsor, but the plan sponsor can choose to take the advice or not.

Prior to that allowance, only about 300 Merrill advisers could work with 401(k) plans as a fiduciary. Now, 4,100 advisers can do so — or nearly 30% of its adviser force. They need to meet certain parameters, such as having a certain number of retirement plan clients and required training, to be eligible.

Merrill's new discretionary offering can only be distributed by these designated fiduciary advisers. The product will offer 401(k) clients the option of three Merrill-managed investment menus — core, core plus and expanded — which differ in the number of specialty asset classes available.

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