The Department of Labor’s proposed fiduciary rule will
affect $3 trillion of client assets and $19 billion of revenue at full-service
wealth management firms, Morningstar says.
“We asses that the U.S. Department of Labor’s proposed conflict-of-interest, or
fiduciary standard, rule could drastically alter the profits and business
models of investment product manufacturers like BlackRock and wealth management
firms like Morgan Stanley that serve retirement accounts,” Morningstar says.
While government and financial industry groups have estimated the rule could
cost as much as $1.1 billion a year, Morningstar says it will cost a minimum of
$2.4 billion.
Furthermore, Morningstar says, “The rule’s financial
repercussions extend far beyond wealth management firms. Full-service wealth
managers may convert commission-based IRAs to fee-based IRAs to avoid the
additional compliance costs of the rule.” Fee-based accounts generate up to 60%
more revenue than commission-based accounts, which could add $13 billion of
revenue to the industry each year.
Robo-advisers stand to benefit from the rule, particularly
among low-balance IRA assets. Additionally, Morningstar estimates that more
than $1 trillion of assets could flow into passive investment products and that
discount brokerages, which frequently specialize in passive investment products,
will also profit from the rule.
Morningstar’s comments on the rule can be viewed here.
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Section 336 of the Protecting Americans from Tax Hikes (PATH) Act (S. 2029), which was passed as part of the recent budget deal
signed into law by President Obama on December 18, 2015, contains a
number of significant provisions affecting church plans, according to a
Groom Law Group Benefits Brief.
The measure addresses each of the five issues in bills previously introduced
to Congress by lawmakers, including controlled group rules,
grandfathered defined benefit (DB) plans, automatic enrollment in church
defined contribution (DC) plans, transfers between 403(b) and 401(a)
plans, and investing in collective trusts.
Previously, the
controlled group rules for tax-exempt employers may have required
certain church-affiliated employers to be included in one controlled
group (i.e., treated as a single employer), even though they have little
relation to one another. Groom Law Group explains that the PATH Act
adds further clarification in the form of a general rule that an
organization that is otherwise eligible to participate in a church plan
shall not be aggregated with another such organization and treated as a
single employer with such other organization for a plan year beginning
in a taxable year unless (i) one such organization provides (directly or
indirectly) at least 80% of the operating funds for the other
organization during the preceding taxable year of the recipient
organization, and (ii) there is a degree of common management or
supervision between the organizations such that the organization
providing the operating funds is directly involved in the day-to-day
operations of the other organization. There are two exceptions to this
rule, explained in the Benefits Brief.
Groom notes that the
legislative history of the act includes commentary that none of the new
legislation is intended to have, or appears to have, any impact on the ongoing litigation against church-related hospitals over the church plan definition.
NEXT: More new legislation for church plans
Changing the current provision of the Internal Revenue Code Section
415 regulations, the act provides that grandfathered defined benefit
church retirement income accounts under section 403(b)(9) will be
subject to the defined benefit limitations of code section 415(b), and
not the defined contribution limitations of code section 415(c). This
applies to years beginning before, on, or after the date of the
enactment of the legislation.
According to Groom Law Group, a new
Code section 414(z) has been added by the act which will permit
tax-deferred transfers of all or a portion of the accrued benefit of a
participant or beneficiary, whether or not vested, from a church plan
that is a plan described in section 401(a) or an annuity contract
described in section 403(b) (which includes 403(b)(7) custodial accounts
and 403(b)(9) retirement income accounts) to an annuity contract
described in section 403(b), if such plan and annuity contract are both
maintained by the same church or convention or association of churches,
and similarly from an annuity contract described in section 403(b) to a
church plan that is a plan described in section 401(a), again if such
plan and annuity contract are both maintained by the same church or
convention or association of churches. The provision also permits a
merger of a church plan that is a plan described in section 401(a), or
an annuity contract described in section 403(b), with an annuity
contract described in section 403(b), if such plan and annuity contract
are both maintained by the same church or convention or association of
churches.
The act provides availability of automatic enrollment
for church DC retirement plans by preempting any state laws that may be
inconsistent with including auto-enrollment features in church DC
retirement plans.
Finally, the act has added a provision that church plan investment
boards may invest assets in a group trust described in Internal Revenue
Service Revenue Ruling 81–100 (often called “collective trusts”),
without adversely affecting the tax status of the group trust, the plan,
account, investment board organization, or any other plan or trust that
invests in the group trust. This provision applies to investments made
after the date of enactment of the new legislation.