(From Issue 4, 2016)
Tsunami, cyclone, hurricane, wave—pick a meteorological metaphor, but it was only last year that the coming movement of money out of 401ks and into IRAs was described with such hyperbole. BrightScope analyzed government data which showed more money leaving 401(k) plans then entering, a signal that long-predicted baby boomer retirement had hit its stride, if not its peak. It was only a matter of time before the IRA rollover deluge was on.
“Investors pulled a net $11.4 billion from tax-deferred savings plans in 2013 …ending decades of expansion,” The Wall Street Journal heralded when reporting on the findings. “The movement out of 401(k)s is expected to accelerate in the coming decade as more baby boomers retire, squeezing large money-management firms that rely on fees charged to employers and investors as a chief profit engine, some analysts said.”
It quoted none other than the Investment Company Institute in noting most funds leaving 401(k)-style plans were migrating to IRAs.
“Assets held by 401k plans ballooned to $4.6 trillion in the fourth quarter of 2014, up 171 percent from $1.7 trillion in 2000, according to the Investment Company Institute,” the paper wrote. “Now the 401k generation is ready to take its money out, as the number of Americans reaching retirement age this year is expected to hit 3.5 million, up from 2.7 million in 2010, according to J.P. Morgan Chase and Census Bureau data.”
Similar research outfits claimed hundreds-of-billions of dollars in rollovers in less than five years, with IRAs (unsurprisingly) hitting all-time highs after all-time highs.
The industry outlook was bright, 401k advisors saw opportunity (and massive at that) and retirees would have more care and control over where, how and when the as-sets they spent a lifetime accumulating were invested and eventually distributed.
And then the DOL’s fiduciary rule hit.
Known officially as the Department of Labor’s Conflict of Interest Rule, its April 2016 introduction was long on regulation and short on how, exactly, it would be implemented or enforced. However, this much is clear—it requires “all who provide retirement investment advice to plans and IRAs to abide by a fiduciary standard; put-ting their clients’ best interest before their own profits.”
Of particular interest was the provision detailing rollovers out of 401ks, and that the advisor could be prohibited from recommending such a thing if he was to receive additional compensation from the action. The possibility of regulatory sanction, combined with a diminished—if not altogether eliminated—financial incentive for doing so has many wondering if rollover surge will evaporate, if it already hasn’t.
Washington-watcher Skip Schweiss is one.
“There are an awful lot of financial advisors out there (and I’m using that term broadly; brokers, insurance agents, etc.) that have 40 percent to 50 percent of their books in rollovers,” says Schweiss, managing director of advisor advocacy and industry affairs with TD Ameritrade Institution-al, as well as head of the firm’s retirement plan services. “They’ll have to have greater care in selling [the value-proposition of] their businesses and justifying those rollovers. For better or worse, rollovers are often a vehicle for products sold, and they’re going to be hard-pressed to say their clients are better off in the rollover than they are in 401(k) plan.”
Of course, he notes it’s not all apples-to-apples and focused just on fees and compensation. RIAs in particular can provide a greater level of service than participants are getting in the 401k plan; for instance, with holistic financial planning that can justify the rollover activity.
And he mentions another trend recently seen; more employers doing all they can to retain the assets of their former employees within the company 401k plan. With the size of the aforementioned baby boomer retirement wave, plan sponsors are worried it will make it more difficult to hit break-points and negotiate lower fees.
“There is an argument to keep the retired employees assets in the plan in order to take advantage of economies of scale, but that will really be up to the individual plan sponsor. Some will say they don’t want to wake up in 10 years and have to try and track the retiree down, so just get it out of there now.”
He adds a stark piece of advice, especially for “RIAs that haven’t been paying attention.”
“I read a piece written by an RIA recently that said, ‘Well, it will just be a few more pieces of paperwork. No big deal.’ I beg to differ. This is an ERISA regulation, and a fiduciary is not a fiduciary is not a fiduciary. By that I mean we’ve had all this talk about fiduciary for years, and there’s the ’40 Act definition of fiduciary versus ERISA. Bot-tom-line: RIAs will have to up their game.”
Advisor Alex Assaley agrees, and sees it as a refreshing development for the industry overall.
“401(k) advisors will need to decide if they want to provide individual advice at the participant level. If so, there are ways for them to act as fiduciaries on the plan and still handle the rollover as long as the differences in the cost structure, services provided and the benefits of doing so are clear and transparent,” Assaley, managing principal and lead advisor with AFS 401(k) Retirement Services, explains.
More importantly, it’s good for the industry, because advisors “will really have to decide if a rollover is in the client’s best interest. Sometimes it absolutely makes sense to keep the assets in the 401k plan. So the rollover market will change dramatically, but it’s not going away.”
The uproar over the fiduciary rule’s required implementation and general con-fusion over how it will work (with many contending it was left deliberately vague for trial lawyers to define through legal action) has the DOL attempting to provide guidance. In late October, it announced a FAQ, its first in a promised series, to help sort it out.
“Look specifically at question No. 14,” instructs Ary Rosenbaum, an ERISA/retirement plan attorney with The RosenbaumLaw Firm P.C. “It’s smack dab in the IRA rollover space.”
The question in …well, question reads as follows:
“Can an adviser and financial institution rely on the level fee provisions of the BIC Exemption for investment advice to roll over from an existing plan to an IRA if the adviser does not have reliable information about the existing plan’s expenses and features?”
The BIC Exemption (or Best Interest Contract Exemption) allows for commissions to be charged if the advisor is providing non-discretionary advice.
And the answer?
“…The streamlined level fee provisions of the BIC Exemption require advisers and financial institutions to document the reasons why the advice was considered to be in the best interest of the retirement investor.
The documentation must take into account the fees and expenses associated with both the existing plan and the IRA; whether the employer pays for some or all of the existing plan’s administrative expenses; and the different levels of services and investments available under each option.”
In order to satisfy the requirement, the DOL writes that the advisor and financial institution must “make diligent and prudent efforts” to obtain information on the existing plan.
In general, such information should be readily available as a result of DOL regulations mandating plan disclosure of information to the plan’s participants.
“Should” is the operative word. Some firms have already decided it’s simply too risky. In early November, Bank of America Merrill Lynch announced new rules specifically prohibiting its brokerage clients buying mutual funds in their commissioned-based IRAs.
“It’s going to push a lot of other firms to not want to do rollovers; basically they won’t want to do the work that it entails,” Rosenbaum concludes. “Will it be worth their time or expense to try and get the IRA rollover? They’ll not only have to look at the rollover, but at the overall 401k plan and business in order to ensure that it’s in the best interest. No one will want to take on that fiduciary liability.”
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.
