We have to wonder about the other 45 percent. New research finds just over half of 401(k) advisors surveyed either plan to, or are very likely to, review mutual funds used in client defined contribution plans before the fiduciary rule takes effect.
“The Department of Labor’s Conflict of Interest Rule, commonly known as the fiduciary rule, will cause a surge in mutual funds being reviewed and replaced in employer-sponsored defined contribution retirement plans, even before the Jan. 1, 2018 deadline for full compliance,” according to Ignites Retirement Research.
Before the rule goes into effect, one-third of financial advisors who counsel DC plans already plan to make changes to mutual funds used in their clients’ DC plans in 2017. And another 9 percent are likely to make changes.
Ignites adds that half of the advisors surveyed say they are busy scheduling meetings with plan sponsors about the impact of the rule and reviewing investment products (strategies, investment vehicles, fee structures, share classes) in DC plans. And another 17 percent of these advisors are very likely to meet with plan sponsors before the fiduciary rule’s final deadline.
“The fiduciary rule will cause plan advisors to scrutinize the cost of mutual funds in DC plans, which should set in motion tens of billions of dollars in mutual fund assets,” says Loren Fox, director of Ignites Retirement Research and co-author of the report. “DC plans are gradually shifting to lower-cost and passive products That will make pricier, actively managed mutual funds a harder sell.”
Some 26 percent of plan advisors surveyed in the report expect index equity mutual funds to be the top winner in DC plans in the aftermath of the implementation of the fiduciary rule; which makes sense, according to Ignites, because actively managed funds are, on average, more expensive than index funds.
For similar price reasons, 23 percent of plan advisors plan to increase their use of products mixing active and passive strategies.
Among the products likely hurt by the fiduciary rule, 8 percent of plan advisors expect to scale back their use of variable annuities, most of which sell on a commission basis and therefore represent potential conflicts of interest under the new regulations. And 7 percent of plan advisors expect to reduce their use of actively managed equity mutual funds in DC plans.
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.
Broaden your thinking to include CITs when you do your reviews. Don’t think about just mutual funds.