Report: DOL Rule Could Freeze IRA Rollovers

Nearly half of projected individual retirement account (IRA) rollover assets are “at-risk” of remaining in the defined contribution plan-sponsor market once the Department of Labor’s fiduciary rule goes into effect, a new report claims.

Assets that don’t roll over into retail IRA accounts, a transaction considered a big cross-selling opportunity for retirement advisors, would cut into revenues generated by financial advisors since fewer dollars are “in motion.”

The fiduciary rule, which raises investment advice standards and professional liability risks for advisors, is scheduled to begin taking effect in April.

Defined contribution plan providers, which have aggressively promoted the use of incentives to roll assets into an IRA, will have to change their strategy, the report noted.

“Marketing messages related to promoting an IRA rollover will need to be thoroughly assessed and potentially softened,” said Jessica Sclafani, associate director at Cerulli in Boston, in a report titled “U.S. Evolution of the Retirement Investor 2016: Regulation and Investor Addressability.”

IRAs held assets worth an estimated $7.5 trillion at the end of the second quarter and represent one of the fastest-growing segments of the U.S. retirement market. Defined contribution plans held $6.9 trillion at the end of the second quarter, according to mutual fund data.

Changing Profile of 401(k)s

The report is the latest in a handful that estimate how much advisor revenue is at stake in the rollover market.

A separate study by Cogent Reports in 2015 found that 51 percent of affluent investors with a balance in an employer-sponsored plan were expected to transfer as much as $382 billion into IRAs in the ensuing 12 months.

There were an estimated 43.1 million active 401(k) accounts in the U.S. last year, Cerulli found, and another 13 million “retired” or separated 401(k) accounts.

Retired or separated accounts have shrunk as a percentage of total 401(k) accounts since 2007 due to consolidations and combining 401(k) into new 401(k)s or IRAs, Cerulli said.

The most common reasons 401(k) plan participants choose to roll assets over from an employer-sponsored retirement savings plan were due to advisor recommendations and the consolidation of 401(k) plan assets, according to the report.

Restrictive 401(k) plan designs and the lack of guaranteed income and annuity solutions may also cause investors to roll their money over into an IRA, Sclafani added.

Under the DOL rule assets rolled over from an employer-sponsored plan to an IRA is considered a fiduciary transaction and subject to the higher, more rigorous standard, but the rule is facing challenges in court.

Bifurcation Based on Account Balances

With advisors generating millions of dollars in revenue rolling money from 401(k) plans into IRAs, advisors are unlikely to walk away from such lucrative revenue opportunities, Cerulli researchers said.

Instead, plan advisors are likely to offer “a greater bifurcation” in the level of services offered to IRA clients based on account balances.

Small defined contribution account balances, which could be as low as $5,000 or $50,000, depending on the plan and the advisor, might be channeled into an Internet-based algorithm. Roboadvisors, where the level of service is lower and the costs cheaper, are also an option.

Because advisors are fiduciaries under the DOL rule, “they might not be able to do it for small accounts,” said Marcia Wagner, an attorney in Boston and an expert on the qualified retirement plan market and the Employer Retirement Income Security Act.

Many big mutual funds have already set up roboadvisors and will undoubtedly capture billions in fees and assets from rollovers. The top 10 rollover IRA destinations were Vanguard, Charles Schwab and Fidelity Investments, Cogent reported.

Each of those mutual fund complexes – coincidentally – have recently launched roboadvisor platforms.

Investors Still Unclear About Fees

Every retirement dollar “in motion” from a 401(k) plan into an IRA potentially generates a fee to the advisor or the institutions involved in the transaction.

But despite the DOL’s previous attempts to reveal how much investors pay for employer-sponsored retirement savings plans, many investors remain ignorant about costs, analysts say.

Either investors make little or no effort to find out how much they pay, or when they have dug through the investment materials and prospectus, they don’t understand the schedules buried in the fine print, Cerulli found.

Twenty-three percent of employer-sponsored plan participants didn’t know how much they paid in fees, 20 percent believed they paid no fees at all, and 18.5 percent said they paid only an administrative fee, researchers said.

In addition, 16.3 percent of 401(k) plan participants said their employer pays the 401(k) plan fees, 13.8 percent said plan participants paid investment management and administration fees, and 8.5 percent said they (plan participants) paid only investment management fees, the report found.

InsuranceNewsNet Senior Writer Cyril Tuohy has covered the financial services industry for more than 15 years. Cyril may be reached at [email protected].

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