The $7.3 trillion IRA market is the largest and fastest-growing segment of the U.S. retirement market. The Department of Labor’s (DOL) new conflict of interest rule will, however, impose greater scrutiny and complexity on the rollover market and potentially disrupt proper management of these assets. These are the conclusions of global analytics firm Cerulli Associates in a new survey, “U.S. Evolution of the Retirement Investor 2016: Regulation and investor addressability.” The report explores the future of the IRA rollover market following implementation of the DOL’s fiduciary rule.
Jessica Sclafani, associate director at Cerulli, explained:
“There is general consensus in the retirement industry that more assets will remain in employer-sponsored DC [defined contribution] plans because of the rule. While Cerulli generally agrees with this statement, there are additional considerations, such as the influence of existing advisor relationships, which is the greatest driver of IRA rollover assets, in addition to DC-plan-specific considerations, such as current DC plan design and lack of in-plan retirement income solutions, that may continue to support the migration of DC plan assets to the retail IRA market.”
Using Cerulli’s proprietary IRA rollover model, their research seeks to quantify the degree to which assets traditionally pegged as headed toward the IRA market may now be “at risk” and more likely to remain in employer-sponsored DC plans. Cerulli’s IRA-focused research also examines how IRA providers that are also retirement plan providers will negotiate this new landscape in which it will be more challenging to direct DC plan participants to move assets from a low-cost account with institutional pricing to a higher-cost retail account.
Common wisdom has long held that most investors benefit from rolling over an employer-sponsored 401(k) to a self-directed IRA when permissible. CPA Ed Slott, author of "The Retirement Savings Time Bomb ... and How to Defuse It," told Bankrate.com that IRAs offer "more choice, more control" for consumers than company-sponsored 401(k) plans. "In most cases, a rollover is better," says Slott, author of "The Retirement Savings Time Bomb ... and How to Defuse It." But, he admits, there are some issues -- like holding company stock, early retirement, or threats of law suits, that in specific situations mitigate against roll-over. Of course, for the consumer, the important take-away is that the consumer needs to get good advice.
Unfortunately, the new conflict of interest rules mean, if the study is correct, that consumers are less likely to get that advice, and therefore, are less likely to make the proper investment and management choices.
The reasons are myriad and complex. One example identified in the study is the heavy reliance by consumers accustomed to dealing with institutional employer-sponsored defined contribution plans on call centers for advice and counsel. According to industry reports, the most frequently cited reasons for participants to contact their 401(k) plan call center are to change investments (47%). Plan participants may fear making a mistake online or they may want reassurance throughout the process, so they turn to the 401(k) call center. The topic of investments, whether transactional or informational, can be a precarious one for call centers, especially with the recent regulations passed down from the Department of Labor (DOL). Just because call center representatives are registered does not necessarily mean they can provide investment advice to 401(k) plan participants. As a result, consumer's are left with bad advice, or refusal to give proper advise due to threatened or potential liability for suggesting better alternatives.
Another example is in naming beneficiaries. Even competent investment advisors have difficulty advising plan participants properly, particularly when they are unaware of the specifics of an investor's estate plan. Should a trust be a beneficiary of a qualified plan? As most clients getting proper estate planning advice know, the answer to that question depends upon a variety of factors, including the objectives of the investor, the type of trust, and the availability of other options. The new rules only make it more likely that an investor will be advised to "stay the course," potentially assuring the investor in improper management and investment decisions.
Obviously, the solution for the consumer is to build a team of professional financial and legal advisors working together, and sharing information regarding goals, philosophies, tools, and alternatives. In that way, both the consumer and the participating professionals can be assured that their clients are receiving and implementing proper management and investment decisions.
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