Compliance December 21, 2015

Cerulli Questions Common ‘Fiduciary Rollover’ Narrative

Cerulli Associates does not anticipate a slowdown in adviser-mediated rollover activity in the foreseeable future—whether or not a strengthened fiduciary rule is approved by the DOL. 
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In a new report, Cerulli Associates explores the impact the Department of Labor’s proposed conflict of interest rule may have on future IRA rollovers.

As explained by Bing Waldert, director at Cerulli, even before the Department of Labor (DOL) proposed reforms to the fiduciary advice standard under the Employee Retirement Income Security Act (ERISA), broker/dealers (B/Ds) with large adviser forces were already adapting their businesses away from commissions and proprietary products.

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Producing advisers today have already moved significantly towards fee-based, fiduciary business models, Waldert says. “The industry may continue to see low-end consolidation of advisers and B/Ds not equipped to deal with sweeping regulatory changes,” he predicts, “but firms of scale will continue their business with relatively little disruption.”

The findings are from the latest issue of The Cerulli Edge – Retirement Edition, which argues many DC plans are not designed to accommodate partial withdrawals from separated or retired participants. “Therefore, at retirement, it may be in an investor’s best interest to roll over their accumulated retirement balances to maintain maximum flexibility in retirement income planning,” Waldert explains. “The current inflexibility regarding withdrawals in some DC plans for retired participants is one more reason Cerulli is optimistic about future rollover activity.”

Jessica Sclafani, associate director at Cerulli adds that until retirement income options become more readily available inside DC plans, IRAs “will continue to be the primary consolidation vehicle for retirees, regardless of an evolving regulatory environment.” The Cerulli research shows that just 21% of large 401(k) plan sponsors report having adopted an in-plan retirement income product. While interest and willingness to discuss in-plan retirement income products are growing, obstacles remain to more widespread adoption.

NEXT: An increase in fiduciary advisers

Cerulli says questions of which entities act as fiduciaries and which activities fall under the fiduciary umbrella “have consumed the retirement industry since the Department of Labor issued its proposed Conflict of Interest Rule in April 2015.” If adopted in a version close to its present form, Cerulli predicts the rule “would broaden the fiduciary definition to cover individual retirement account assets and could hasten consolidation among broker/dealers.”

One likely result of a strengthened fiduciary standard, Cerulli says, is increased engagement of ERISA 3(21), 3(38), and 3(16) fiduciary providers. Formalizing the fiduciary duty of an adviser will not eliminate litigation exposure for plan sponsors or advisers, Cerulli says, but these services can reduce potential liability associated with a retirement plan by bringing the appropriate expertise and resources to bear—and by encouraging a teamwork approach and strong communication.  

Cerulli finds almost half (45%) of retirement specialist advisers strive to forgo any fiduciary capacity.

“This will change under the proposed rule, which will turn many advisers into fiduciaries overnight,” Cerulli warns. “The fiduciary proposal includes the Best Interest Contract Exemption, a contract that the investment advice provider must present to a potential client if there is potential for conflicted advice. Industry players have expressed concern about the operational requirements to comply with the BICE, especially as it relates to disclosing compensation.”

More information about obtaining Cerulli Associates research is here. 

Compliance December 21, 2015

Was 2015 the Year of the Fiduciary?

Did you ever think so much controversy and confusion could be tied into one little word? 
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Looking back over a year of compliance coverage on www.planadviser.com, few topics match the volume of reporting filed on the Department of Labor’s (DOL) fiduciary rulemaking effort.

Heading into 2016 the DOL has clearly made real progress on getting new advice standards in place—much to the chagrin of retirement plan industry providers, who will be policed by the tightened regulations. The text of the proposed “conflict of interest” rule, as it’s now commonly called, emerged months ago and will soon be reissued in final form.

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Those informed enough to guess about such things project final rule language will be published as soon as January or as late as March or April. It remains to be seen whether the final rule will factor in any of the tremendous volume of industry criticism (and, to a lesser extent, support) registered during several formal comment windows and in-person hearings; whether advisers will still be able to sell to qualified retirement plan clients on commission or other forms of variable compensation; or whether a given segment of advisers will have to start papering best interest contracts. Things should finally become clear as 2016 progresses. 

Immediately after the mid-August hearings the DOL appeared to double down on its tough-cop approach, yet later in the year Labor Secretary Thomas Perez hinted at the prospect of more flexibility in a final rule. Industry professionals, especially those on the business development side of the equation, believe the rule-as-proposed is far too restrictive, even punitive, towards an overwhelmingly upright group of companies and individual advisers.

PLANADVISER columnist David C. Kaleda, principal in the Fiduciary Responsibility practice group at the Groom Law Group in Washington, D.C., predicts most advisers will be at least functional fiduciaries by this time in 2017 or 2018 with respect to individual retirement accounts (IRAs), as well as tax-qualified 401(k) and 403(b) plans governed by the Employee Retirement Income Security Act (ERISA), unless major changes are made to the rule language. Perhaps most important for advisers in the new rule language, he says, is the Best-Interest Contract (BIC) exemption approach, which “represents a significant shift in the DOL’s philosophy regarding class exemptions.”

NEXT: More of 2015’s best from the magazine and online 

Columnists Fred Reish, chair of the Financial Services ERISA practice at the law firm Drinker, Biddle & Reath, and Joan Neri, counsel for the Employee Benefits and Executive Compensation group, agree that key aspects of the fiduciary rulemaking clarified in 2015 involve retirement plan distribution advice.

According to Reish’s and Neri’s interpretation, the proposal also “says you would be a fiduciary for recommending a distribution or advising a participant about the investment of assets to be rolled over to an IRA. Under a 2005 DOL advisory opinion (2005-23A), the department said these acts are fiduciary acts if the person making the recommendation is already a fiduciary to the plan. In that guidance, though, the DOL also concluded that, if a person is not already a fiduciary in that context, the recommendation would not be fiduciary advice. The proposal eliminates that distinction.”

For columnist Marcia S. Wagner, managing director of the Wagner Law Group in Boston, equally important is how the fiduciary proposal might impact advice around annuities.

The most recent news on the fiduciary rulemaking effort was perhaps more show than substance. After a great deal of partisan wrangling, Congress reached an agreement on a somewhat long-term budget deal that did not include riders that would have changed or otherwise delayed the DOL’s fiduciary rulemaking. 

For many Republicans and some Democrats in both the House and the Senate this was no small defeat, given the large number of bills and proposals forwarded and/or endorsed by legislators in 2015. It took mere days for new proposals to be introduced in the wake of the budget agreement, but they have little real likelihood of making it into law before the DOL can act.

Whatever happens with the rulemaking in 2016, you’ll be able to find the most up-to-date coverage at www.planadviser.com and in PLANADVISER print. 

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