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How the fiduciary rule is affecting 401(k) rollovers

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The Department of Labor’s controversial fiduciary rule has left retirement plan recordkeepers and asset managers in a quandary over how to handle 401(k) rollovers when participants retire or change jobs.

“The fiduciary rule will change the dynamics of the rollover market, and the plan providers’ response is very much a work in progress,” says Matthew Drinkwater, assistant vice president of the LIMRA Retirement Institute.

In a recent survey of plan providers by the Institute, 75% report they expect to change how they field calls from defined contribution plan participants with questions about their distribution options.

That’s because under the rule, scheduled to take effect in April 2017, offering the slightest hint that it might be unwise for a participant to squander the tax deferral benefits available to them by cashing out their retirement accounts in lieu of doing a rollover would be deemed as a fiduciary action. Also, being too specific about investment options could also confer fiduciary status.

Gun shy

If plan providers are gun shy about triggering fiduciary liability by inadvertently stepping over the invisible line separating “investment education” from “investment advice,” participants might not receive the guidance they need to avoid costly mistakes.

Another possible consequence of the fiduciary rule, Drinkwater predicts, is that some of the top retirement plan providers might raise their minimum investment requirements for individual retirement accounts due to the anticipated higher costs associated with assuming fiduciary duties.

“I could see some of them raising their thresholds to $200,000 or $250,000,” he says.

Meanwhile, smaller registered investment advisors (RIAs) who have always acted on a fiduciary basis (in contrast to investment brokers) generally aren’t interested in smaller accounts for the same reason, he adds.

Whose “best interest”?

However, under the fiduciary rule, investment companies can operate somewhat as they have if they and the investor sign a “best interest contract exemption,” or BICE agreement. That is, the company pledges to act in the investor’s best interest — the standard fiduciaries are expected to maintain. Trouble is, the DOL has not offered any guidelines on what that means.

For example, if a retirement provider representative recommends that an investor put some money in “fund A” believing that it has stronger growth prospects than “fund B,” but fund A’s fees are higher than B’s, would the DOL agree that the rep is acting in the investor’s best interest, or take the opposite view?

What retirement plan providers fear, Drinkwater says, is that “best interest” will only be defined over time by litigation, and nobody wants to learn the DOL’s position by being sued.

Also murky, as noted, is the boundary between investment advice and investment education. “Companies have to walk a fine line,” Drinkwater says. Offering mere investment education does not trigger fiduciary responsibility.

The survey of plan providers revealed considerable uncertainty over the ultimate impact of the fiduciary rule. While 28% expect the rule will help them increase their retention of 401(k) participant assets when those participants have an opportunity to roll them over to another provider, 36% believe it will result in a “minor decline” in their retention rate. That leaves another 36% anticipating no net impact.

Heads up for employers

Meanwhile, many plan sponsors have yet to focus on this question, according to the plan providers Drinkwater has spoken to. And yet one of sponsors’ fiduciary obligations is to be aware of whether the financial advisers who will be servicing their participants upon their departure are acting in compliance with the fiduciary rule. “Plan sponsors’ obligation is to understand,” he says.

Multiple lawsuits are pending to kill the fiduciary rule. Also, Republicans in Congress have proposed legislation to repeal it. While those legislative efforts have been blocked by President Obama, the dynamics could change following this year’s presidential election.

Even so, plan providers are not holding off on gearing up to comply with the fiduciary rule, Drinkwater says.

“If they didn’t start to get ready until the matter was settled and the rule survives, they wouldn’t have time to catch up,” he says.

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