Not that we didn’t already know, but institutional reinforcement is always welcome. The latest research from Cerulli Associates finds that the Department of Labor’s Conflict of Interest Rule provides a tailwind for the adoption of outsourced fiduciary services in the defined contribution plan market.
“Today, it can be difficult to have a DC-related conversation without someone using the terms ‘3(21)’ or ‘3(38),’ which have become DC industry shorthand for nondiscretionary versus discretionary advice,” Jessica Sclafani, associate director at Cerulli, said in a statement. “Because of the growing awareness of the role and responsibilities of a fiduciary—among plan sponsors and their intermediaries—there is more attention being paid to fiduciary service providers that will act in an ERISA 3(21) or ERISA 3(38) capacity relative to a DC plan’s fund lineup.”
In the mid-sized to large DC plan asset segments, the term “fiduciary services” typically refers to outsourced chief investment officer (OCIO) mandates, she added.
“In a DC plan context, OCIO services can extend to the assets of the entire plan or specific investment options offered on the plan menu. In contrast to the OCIO services being offered in the large to mega-plan asset segments of the DC market, the concept of minimizing or ring-fencing fiduciary liability in the micro to small DC plan segments is manifesting itself in the increasing interest and use of fiduciary services ‘baked in’ at the recordkeeper.”
“Baked in” refers to when a recordkeeper will engage a provider to conduct further due diligence on the investment options available on a given platform to generate a narrowed list of funds for which the provider will serve as an ERISA 3(21) or ERISA 3(38) co-fiduciary.
A new category has emerged to describe the providers offering these services—”shadow fiduciaries.”
The most well-known and frequently cited examples include Morningstar, Mesirow, Wilshire, and Envestnet.
“Overall, there appears to be industry recognition that fiduciary services are influencing greater DC assets, and that this is a trend likely to persist,” Sclafani concluded. “Cerulli recommends asset managers proactively assess their current exposure to DC plans likely to use these services and conduct a review of how the various fiduciary service providers are being engaged at a firm-wide level, and whether there is opportunity for optimization from a DC distribution perspective.”
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
