Brokers who work with retirement plans may soon lose clients to registered investment advisers, thanks to a rule that the Labor Department is expected to approve this summer.
The rule, one of a series of proposals the department is considering that are aimed at eliminating conflicts of interest in retirement plans, would require registered representatives, investment advisers and others who work with 401(k) plan sponsors to declare whether they are acting as fiduciaries.
The providers also would be required to provide plans with detailed overviews of their services and compensation. Brokers, who until now have been informally providing investment advice to small retirement plans, would be restricted to educating clients about their different options.
That could open the door for RIAs, who collect fees similar to those brokers charge, but can provide advice as fiduciaries.
“Plan sponsors thought they hired the expertise, but now they get a document saying, "We're not ERISA fiduciaries,' so they'll wonder why they need that broker around,” said Jason C. Roberts, a partner at the law firm of Reish & Reicher.
The upcoming rule — referred to as the 408(b)(2) rule after a section in the Employee Retirement Income Security Act of 1974 — will affect any rep and adviser who has ever sold a retirement plan, he said.
Broker-dealers and registered reps, already facing an onslaught of proposed 401(k) rules, will be affected by this fee disclosure rule because many of the retirement plans are too small for plan consultants and bigger RIAs.
The rule, which is under review by the Office of Management and Budget, is expected to be released by the Labor Department this summer and take effect early next year.
Brokers, of course, have always been permitted to present only those plans that offer an array of investments; since they aren't fiduciaries, they aren't allowed to make specific recommendations on which of the many investments to choose. In reality, however, many reps have been making recommendations at the request of the plan sponsors, who experts said have assumed that they were fiduciaries.
But the new rule means that these reps will have to spell out exactly what they can and can't do — especially when it comes to off-the-cuff investment advice.
“If the plan sponsor wasn't aware that you were earning an extra point or so and then you provide fee disclosure, it might jeopardize the relationship,” said Jason Hochstadt, executive vice president of Jedi Management Inc. The RIA firm manages $15 million and works with plans having less than $5 million in assets.
“That will transition a lot of business to models like ours,” Mr. Hochstadt says.
Preparing to comply with the rule, broker-dealers have been splitting their brokers into two camps: those who specialize in 401(k) services and those who merely dabble in them. Dually registered advisers can transition into firms' 401(k) fiduciary programs if they are available.
Firms are also working on service agreements for their reps but are waiting for more guidance from the Labor Department. Still, they are giving a heads-up to their reps that their businesses will likely change.
Amy Glynn, director of Retirement Consulting Services at Commonwealth Financial Network, said that for brokers who sell plans, the firm will help them work solely as educators, or will provide additional training and access to a consulting program that allows them to work as fiduciaries with ERISA accounts.
Not everyone thinks that reps' shift to an educational role would dent relationships with plan sponsors. Bo Bohanan, director of retirement plan consulting at Raymond James Financial Inc., noted that long-standing relationships lend themselves to credibility, and some plan sponsors will accept their reps in their new roles.
“If there were some new wave in dentistry, and your trusted dentist of 20 years didn't use it, would you stop seeing him?” he asked. “This is a relationship-based business.”
Mr. Hochstadt agrees. “If you're disclosing the fees and providing the service, you might not be affected,” he said. “Plan sponsors might need to reassess the relationship if the services expected aren't provided.”
Others doubt that big RIAs would be interested in advising smaller 401(k) plans.
“If we trafficked in the $3 million plan marketplace, I'd expect more business,” said Michael J. Francis, president of Francis Investment Counsel LLC. The firm manages $3.8 billion in assets, and the average plan size ranges between $70 million and $100 million.
“The small doctor's shop and garage operations will always be looking hard for advice, and they'll struggle to find it,” Mr. Francis said.
E-mail Darla Mercado at [email protected].
