Data & Research February 11, 2013

Advisers May Help 529 Sales More Than Expected

Financial advisers may boost sales of 529 plans far more than plan assets and net sales suggest, according to a report.
Reported by

FRC, a division of Strategic Insight, found in a survey of about 300 financial advisers that 84% of registered investment advisers (RIAs) and 60% of financial advisers and dual-registered advisers recommend direct-sold plans.

“This is especially important intelligence for product providers and primary distributors who often underestimate the extent to which advisers influence client decisions of both adviser-sold and direct-sold plans,” said Paul Curley, director of FRC’s 529 research practice. “Although this may sound counterintuitive to 529 providers, increased engagement with advisers could strongly enhance the growth of both types of 529 plans.”     

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There is a perception that 529 plans are generally smaller investments, which limits some advisers’ enthusiasm for them. However, the FRC survey found that advisers think 529s can often lead to larger assets and relationships. Nearly two-thirds said that more than 20% of their 529 clients open other accounts, such as from rollovers.

Survey respondents’ top reasons for recommending direct-sold plans are lower fees, in-state tax incentives and efficiency. Of the 37% of advisers surveyed who never recommend direct-sold plans, 44% reported a lack of commission or trails as a reason, and 34% claimed that adviser-sold plans tend to have a better selection of investment options.

The direct-sold channel has grown faster than the adviser-sold channel, the report noted. In order for the adviser-sold channel to regain comparative asset accumulation momentum, providers must drive net flow growth through product management enhancements that align with adviser support, selection and distribution preferences.

Advisers said the following improvements could increase asset flows into all types of 529 college savings plans: more streamlined paperwork, an increase in the number of investment reallocations per year, an expanded list of “qualified” higher education expenses, a reduction in state fees and more automatic payroll deduction plans for college savings through employers.

Advisers consider 529 plans the product of choice, but several other products are used at least 10% of the time. These include trusts and non-529 mutual funds or exchange-traded funds (the most frequently used), as well as prepaid 529 plans, Coverdell education savings accounts (ESAs), traditional or Roth IRAs, insurance products with cash values, and cash or other banking products, according to the report. The average adviser uses roughly three products, and advisers who have access to and use 529 prepaid plans usually coordinate them with 529 savings plans, the report found.

The 2013 edition of FRC’s college savings plans report focuses on how program managers and other members of the 529 industry can increase plan sales through financial advisers. The report contains useful information and strategies for program managers, state agencies and treasury departments, primary distributors, product providers and broker/dealers, Curley said. The report’s five main sections include an overview of college savings market trends, product, distribution and support preferences, and strategic recommendations for the various 529 industry constituencies.

The survey respondents represented advisers across all types of distribution channels, compensation models, tenure ranks, asset levels and regions within the U.S.

Contact Kathy Marshall at kathy.marshall@frcnet.com for information about how to purchase the study. 

Compliance February 11, 2013

Fidelity Facing Suit Regarding Float Income

Participants from three 401(k) plans have filed a lawsuit against Fidelity Investments regarding its use of float income.
Reported by

The participants allege Fidelity engaged in prohibited transactions and breached its fiduciary duty by using float income to pay itself trust and recordkeeping fees above and beyond the fees authorized in the trust agreements between the plans and Fidelity. The lawsuit claims Fidelity engaged in repeated self-dealing transactions and breaches of duty in violation of §406 and §404 of the Employee Retirement Income Security Act (ERISA) whenever it paid itself float income.   

In addition, the complaint says Fidelity engaged in prohibited transactions and breached its fiduciary duty by remitting float income into the mutual fund options selected by the plans’ participants without crediting the amount of that float income to the contributions made by the plans or the plans’ participants. “This had the effect of disseminating the value of the float income generated by the plans’ assets to all of the investors in the mutual fund and substantially diluting the value of the float income received by the plans and the plans’ participants”—also in violation of §406 and §404 of ERISA, according to the complaint.  

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When plan assets are deposited on an interim basis in interest-bearing accounts before invested or disbursed as directed by the plans’ participants, the income earned on or derived from the assets while invested in such accounts is “float income.” (See “Be Careful Not to ‘Float’ into an ERISA Violation”.)  

The lawsuit used the trial record from Tussey v. ABB (see “Employer to Pay for Failing to Monitor RK Costs”), which the complaint says reveals that Fidelity’s practice of misallocating float income did not just victimize the ABB PRISM Plans investor classes represented in that case, but harmed the entire population of Fidelity’s client retirement plans and investors to whom Fidelity owed fiduciary duties under ERISA.  

The lawsuit seeks to recover the float income that Fidelity “improperly took” from members of a proposed nationwide class.  

The complaint is here.

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