A new study by Cerulli Associates looks at how wealth managers must navigate the looming Department of Labor (DOL) fiduciary rule when recommending individual retirement account (IRA) rollovers to defined contribution (DC) participants.
As wealth management firms move into the retirement planning space, more will have to comply with the Employee Retirement Income Security Act of 1974 (ERISA), and thereby, the pending fiduciary rule proposed by the DOL in October. The Retirement Security Rule: Definition of an Investment Advice Fiduciary would extend the title of a fiduciary to professionals outside of the retirement planning industry, including insurance agents who recommend annuity products or IRA rollovers.
Additionally, according to Cerulli, the proposed test would include advisors who provide retirement advice on a regular basis as part of their business, rather than considering the “regular basis” condition within the context of an advisor’s relationship with the end-investor.
With a higher number of wealth management firms providing retirement planning services, it’s likely that fiduciary status under ERISA will expand to include them.
The proposal had been met with swift pushback from the insurance industry, many whom claimed the rule would unfairly persecute insurance agents who were not familiar with ERISA practices and who do not have insurance that includes fiduciary coverage.
“While regulation promoting a fiduciary standard often benefits end-investors, there likely will be pushback on these key provisions from the insurance industry and broker/dealer-based advisors who sell commission-laden annuity products,” says Shawn O’Brien, director at Cerulli Associates, in a statement. “Opponents of the proposal note that the Securities and Exchange Commission (SEC) already is enforcing Regulation Best Interest (Reg BI) outside of ERISA-covered retirement plans.”
“The Cerulli Edge—U.S. Retirement Edition” notes that 63% of the $845 billion in assets rolled over from DC plans in 2022 were rolled into IRAs with the assistance of a financial advisor. In fact, participants generally rely on their advisors even more during a rollover process—70% of retirement plan advisors say DC participants will ask more questions regarding IRA rollovers.
These rollover options are expected to continue growing in the coming years, too, a past LIMRA retirement study noted. According to the LIMRA report, these rollovers will account for $760 billion annually within the next five years.
This growth potential will likely influence financial advisors to continue converging both wealth management and retirement planning services, a trend that’s gone on in past years and is anticipated to continue beyond 2024.
Cerulli doesn’t believe it will see a decline in wealth managers recommending IRA rollovers if the proposed rule is enacted, especially among plans with high-priced balances or with high net-worth clients. “If enacted, Cerulli would not expect this regulation to have a meaningful impact on higher rollover balances if these balances (and clients’ household wealth) make it worthwhile for advisors to take on the added regulatory scrutiny,” O’Brien concludes.
SEE MORE:
- Insurance Industry Questions Next Steps for DOL Fiduciary Rule
- Congress Voicing Concerns with DOL Fiduciary Rule Proposal
- EY Outlook Names Growing Inclusion, AI, as Leading Trends in Wealth Management
Amanda Umpierrez is the Managing Editor of 401(k) Specialist magazine. She is a financial services reporter with over six years of experience and a passion for telling stories and reporting news. Amanda received her degree in journalism and government and politics at St. John’s University. She is originally from Queens, New York, but now resides in Denver, Colorado with her partner. In her free time, Amanda enjoys running, cooking, and watching the latest drama show.
