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FAs to Decrease Micro DC Plan Service Post-DOL Rule

By Grace Williams November 21, 2016

Assuming it isn’t repealed by president-elect Donald Trump’s administration, the Department of Labor’s new fiduciary rule could lead directly to a decrease in the number of advisors willing to manage smaller defined contribution plans, new research reveals.

A survey of 251 retirement advisors forecasts that a large number of advisors will review their current relationships with the smallest of DC plans and will likely take on fewer “micro” customers.

The DOL’s new regulations force advisors that manage retirement savings to act in the best interests of their clients. Compliance with the rule is currently scheduled to commence April 10, with full compliance required by January 1, 2018. With less than six months until the initial compliance deadline, many firms are keenly reviewing their processes and offerings.

The survey, conducted by FA-IQ stablemate Ignites Research, polled retirement advisors on the FT 401 list of top retirement advisors. The average FT 401 advisor manages $950 million in defined contribution plan assets and has 18 years of experience advising DC plans.

Around 30% of FT 401 advisors plan to take on fewer micro DC plan clients as a result of the impending implementation of the fiduciary rule. And about a tenth (11%) said they were likely to reduce the number of micro DC plans – those with less than $5 million in plan AUM – that they currently advise.

Presently micro plans account for roughly a third of FT 401 plan advisors’ total DC plan assets under management.

Assets within plans are set for a review in an effort to ensure all instruments used are compliant with the DOL’s fiduciary rule.

Advisors anticipate that the selection of various share classes of funds will become increasingly important in a fiduciary landscape. A vast majority of advisors (80%) think share class suitability is the “top factor” that will help FAs evince that they’re acting in their clients’ best interest.

Within fund share classes, mutual fund R6 shares – which don’t have loads, 12b-1 fees or administrative fees – are where FT 401 advisors expect the fiduciary rule to spark the most growth.

One-third of advisors that counsel employer-sponsored DC plans already plan to make changes to the mutual funds they use – before the rule even goes into effect.

Nearly half (45%) will review the mutual funds in their DC plans. Moreover, 40% will review service providers for their DC plans.

“It boils down to how are retirement advisors going to select investments and get compensated for advising DC plans,” says Loren Fox, director of research for Ignites, in an interview. “They are going to have to look at what it means to provide advice that is potentially free of conflicts of interest.”

Yet considering that the rule impacts all retirement savings assets and effectively bans commission-based remuneration in favor of fees on such accounts, Fox said it was surprising that only half of all respondents said they planned to meet with plan sponsors to explain the rule’s impact, while just 17% are very likely to plan such a meeting.

However, it seems that at the high end of the DC advice spectrum, many advisors have already moved towards a conflict-free remuneration model. Some 80% of the average FT 401 plan advisor’s total revenue already comes from level-fee sources which would be permissible under the fiduciary rule, while just 20% currently comes from variable compensation.

Nonetheless, the types of instruments used are still likely to change under the DOL rule. Over a quarter (26%) of advisors polled will increase their use of index equity mutual funds, while another 23% will turn to a mix of passive and active products. ETFs and target date funds, which received 17% and 12% of the vote, respectively.

Loren Fox

Jay Jacobs, director of research for New York-based ETF provider Global X, which manages $3.8 billion, says his desired outcome would be for ETFs to become more widely available as an offering for DC assets.

In an interview with FA-IQ, Jacobs noted that up until now, ETFs have been a miniscule part of DC assets due to outdated software that does not account for intraday trading. This has meant ETFs must be packaged with other structures that look and feel like mutual funds.

“We would like to put pressure to include ETFs on software build outs,” he says, adding that there’s a lot of strategy being missed if retirement accounts are limited to passively-managed mutual funds.

Even so, Ignites Research continues to predict business as usual in the ETF space for the time being.

“We expect a significant piece of any ETF growth in DC plans to be driven by their use as underlying investments in packaged products,” wrote Ignites.