With the defined contribution (DC) index at a crossroads with more workers relying on their 401k or 403b plan as the primary source of income in retirement, the DOL conflict of interest rule along with the rash of lawsuits, will further accelerate that change. But most affected by the rule will be advisors and their relationship with plan sponsors.
According to a report released by Ignites Retirement Research, the DOL conflict of interest rule will cause an increase in the review of funds resulting in changes likely to adversely affect actively managed funds.
Based on surveys with Elite Plan Advisors with an average of $770 million of DC AUM, heightened fiduciary concerns will also hurt sales of annuities. The focus on fees will also result in advisors recommending low cost index funds as well as those that pay commissions with 26% of advisors indicating that passive investments will be the big winner as a result of the DOL rule with 23% likely to increase their use of them.
Though not in the Ignites survey, the DOL rule is also likely to accelerate the move to funds that do not pay revenue sharing which not only appear to be less expensive but are easier for plan sponsors to understand and might be protection against lawsuits.
Many advisors dabbling in the DC market not able or willing to act as a fiduciary will exit the market leaving plan sponsors to either go it alone, rely on a robo fiduciary or try to find another advisor. For experienced and knowledgeable advisors, it’s an opportunity to expand their DC business. Ignites reports that 50% of surveyed advisors already plan to meet with clients about the rule with another 17% likely to meet while over 50% will conduct a review of funds and service providers.
DC plan sponsors are waking up not just because of fiduciary or cost concerns but also because of the greater dependence on 401k and 403b plans by employees. The DOL conflict of interest rule is just another reason for companies to pay greater attention not just to their DC plan but also to the advisor servicing it with fundamental questions like:
- Can they serve as a co-fiduciary to the plan?
- Do they have the requisite experience, knowledge and training to serve a company like mine?
- Are they being paid by commission and is there a financial incentive to suggest one investment over another?
- What services do they offer for what fee and is that reasonable?
- Does their broker dealer have conflicts that might affect my relationship with my advisor?
