Ever since the Labor Department handed down its rule to raise investment-advice standards for retirement accounts
this past spring, stakeholders have postulated effects the proposed regulation will have on the 401(k) and IRA markets.
One main area of focus has been IRA rollovers. Providing advice on IRA assets, an act not beholden to a fiduciary standard of care under the Employee Retirement Income Security Act of 1974, would be held to a fiduciary standard under the DOL's proposed rule.
That's caused some in the financial industry to claim IRA rollover activity would slow down, as brokers currently held to a less-stringent suitability standard of care abandon prospecting IRA rollover business from 401(k) plans to avoid liability risks and regulatory costs.
Others believe the effect would be minuscule.
“IRA rollover activity is unlikely to be meaningfully changed should the proposed rule be implemented,” said Jessica Sclafani, associate director at research firm Cerulli Associates.
New money from IRA rollovers contributed $377 billion to overall IRA assets in 2014, according to Cerulli data. IRAs
hold $7.4 trillion in assets, compared to the $6.8 trillion held in defined contribution plans, according to the Investment Company Institute.
“I don't think [the rule] is going to have a huge impact,” Kirk Cassidy, president and CEO of Senior Planning Advisors, said. “I think it'd still make sense for most people [to roll over] given the opportunity.”
The
lack of retirement income products currently offered in 401(k) plans creates a dynamic where participants can largely only tap into annuity-type products through the retail market. Only 8.5% of 401(k) plans offer lifetime income options to participants, according to the Plan Sponsor Council of America.
If investors want to use such a product, they won't keep their money in the 401(k) market, some industry watchers say.
“I don't see people staying in plan more,” said Barbara March, chief executive of BridgePoint Group, a financial services consultancy. “I agree that people will continue to flow out to alternative investments [such as annuities].”
Further, the fiduciary rule will likely force more transparency in annuity pricing, Ms. March said. That could make annuities more palatable in the retail market because the “perception of cost” is a major barrier to their adoption, she said.
The inability for most 401(k) plans to offer flexible or ad hoc withdrawals to participants also makes IRA rollovers attractive for investors, according to a new Cerulli report, which claims IRA rollovers wouldn't be meaningfully impacted in the near term if the proposed DOL rule were implemented. An ad hoc withdrawal refers to a one-time distribution that's separate from the regular monthly distributions a participant may be receiving from the 401(k) plan in retirement.
“As participants get older and there's a greater likelihood of a health scare, they need to be able to access these funds,” Ms. Sclafani said. “And if they're still in a DC plan, the chances they have that flexibility for a partial withdrawal is not very common.”
According to Vanguard Group's How America Saves 2015 report, around 10% of defined contribution plans offer an ad hoc partial distribution.
“The plan document always rules on that. A plan sponsor can write withdrawal rules however they want to as long as they don't conflict with ERISA,” according to Robert E. Pike, president and chief executive at Stratford Advisors.
There could also be an inability on the part of the plan's record keeper to accommodate partial withdrawals, he added.
Of course, there are those who
expect a major shake-up in the way broker-dealers do business with IRAs, which could in turn curb rollovers. The DOL rule would only allow variable forms of compensation — such as commissions, revenue sharing and 12b-1 fees — to be paid to brokers if brokers adhere to what is called the “best interest contract exemption.” That's basically a contract between firms, their representatives and the investor that commits them to providing advice that is in the investor's best interest.
The Securities Industry and Financial Markets Association
estimates total start-up costs of $4.7 billion and ongoing annual costs of $1.1 billion for large and medium firms to comply with the rule.
“I think some of the need to comply may reduce the number of advisers a little bit,” Ms. March said. “But there will still be plenty of advisers who'd like to take those IRA accounts.”
Aside from retirement plan specialists, IRAs are advisers' “bread and butter,” so they will figure out a way to adapt and continue working in that market, she added.
