Advisers Scrambling to Adjust DC Plan Client Investment Lineups

The U.S. Department of Labor’s (DOL)’s conflict of interest rule, or fiduciary rule, will cause a surge in mutual funds being reviewed and replaced in employer-sponsored defined contribution (DC) retirement plans, according to a survey by Ignites Retirement Research. This Financial Times service notes changes are being made even before the January 1, 2018, deadline for full compliance. 

One-third of financial advisers who counsel DC plans already plan to make changes to mutual funds used in their clients’ DC plans in 2017. Another 9% are likely to make such changes. More than half (55%) of the DC plan advisers surveyed by Ignites Retirement Research either plan to, or are very likely to review the mutual funds used in client DC plans before the fiduciary rule takes effect.

To eliminate potential conflicts of interest, the rule will make it more difficult for advisers to DC plans to recommend investment products that pay the advisers additional compensation, Ignites explains.

Ignites Retirement Research surveyed 251 elite plan advisers with an average of $770 million in DC assets under management and found 50% of these advisers 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. Another 17% are very likely to meet with plan sponsors before the fiduciary rule’s final deadline.

“The fiduciary rule will cause plan advisers 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% of plan advisers 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; this makes sense because actively managed funds are on average more expensive than index funds, Ignites says. For similar price-related reasons, 23% of plan advisers plan to increase their use of products mixing active and passive strategies.

Among the products likely hurt by the fiduciary rule, 8% of plan advisers 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% of plan advisers expect to reduce their use of actively managed equity mutual funds in DC plans.

These findings, and more, are contained in Ignites Retirement Research’s new report, “Adapting DCIO Strategy for the Fiduciary Rule.” To learn more about Ignites Research, visit www.ignites-research.com.