Over the last decade, many experts have been predicting less experienced advisers will be forced out of the 401(k) market. With the Department of Labor's conflict-of-interest rule
set to create more fiduciary advisers, those same experts are even more sure.
But they're wrong.
According to research conducted by The Retirement Advisor University, 250,000 out of the 300,000 active financial advisers are working or getting paid on a 401(k) or defined-contribution plan. Of those, 25,000 are what I would consider minimally qualified, with at least $25 million in DC assets under management and five plans; within that group are 2,500 elite DC advisers, who have $250 million in DC AUM, 10 plans and 10 years' experience.
The 225,000 emerging advisers falling outside the realm of minimal qualification are either "accommodators," working on an important wealth-management client's plan to keep other advisers out, or "blind squirrels" — the proverbial brother-in-law, son-in-law or college roommate of a company CEO or other decision-maker.
The DOL's fiduciary rule, set to go into effect on June 9, lowers the requirements for advisers to be a fiduciary, so almost all will either have to act as one under the Employee Retirement Income Security Act of 1974 or outsource that function. Will blind squirrels finally be driven out of the market because their broker-dealer will not allow them to act as an ERISA fiduciary or the adviser does not think the liability is worth the return?
Firstly, 225,000 advisers will not exit the market overnight. Secondly, business owners and managers are not likely to fire a trusted adviser that might provide other services. Finally, most experienced DC plan advisers do not want to service smaller plans with minimal revenue. Some states are
rolling out rules mandating smaller companies to offer a retirement plan at work, so there will be
more smaller plans for advisers to manage.
What is more likely to happen is that over time many blind squirrels will either exit the DC market, referring plans to more experienced advisers, or sell their respective business, while others will get the necessary training and experience to properly service DC plans. Some broker-dealers are either forcing blind-squirrel advisers to
outsource larger plans to fiduciary advisers or making them work with a pre-set investment lineup that uses a third-party investment fiduciary.
While fiduciary concerns may also pressure "accommodators" to get out of the DC market, there's more reason for them to keep servicing the plan to protect the client relationship.
Like with other changes in the DC industry, the DOL did not create the market conditions that will force less-experienced advisers to get out of the market or receive more training. But it will accelerate the movement. The same thing happened in 2012 with the DOL's fee-disclosure rules (rules 408(b)(2) and 404(a)(5), respectively the plan-level and participant disclosures).
And while many experienced DC plan advisers are hoping to get referrals from blind squirrels, the DOL rule
might actually inhibit them, as referrals to one adviser could be considered a fiduciary act.
In the end, DC plan sponsors and participants will benefit from either getting a new adviser with more experience or having their current adviser get more training, all of which will take some time. In any case, blind squirrels will be in the DC market, especially among smaller plans, for the foreseeable future.
Fred Barstein is the founder and CEO of The Retirement Advisor University and The Plan Sponsor University. He is also a contributing editor for InvestmentNews
' Retirement Plan Adviser newsletter.
