Financial Advisor talking to a client

Best Interest Participant Services a Result of DOL Fiduciary Rule

The Department of Labor’s fiduciary rule will have a significant impact on the retirement marketplace. The regulation expands the definition of fiduciary investment advice under the Employee Retirement Income Security Act of 1974 (ERISA) and is intended to eliminate conflicts of interest and apply a “best interest” standard to investment advice related to retirement plans, IRAs, and rollovers. In turn, it elevates those who provide financial advice related to these products to fiduciary status. Today, most retirement plan advisors (85%) already view themselves as a fiduciary to their clients and participants – nearly double the number ten years ago.

85% of retirement plan financial advisors view themselves as a fiduciary. 1

Financial professionals and the retirement industry have responded with new solutions that better serve their clients. Here are some trends that have been developing and are expected to continue going forward: 

Continued popularity of target retirement date funds – Target retirement date fund usage has risen rapidly – roughly 20 percent of assets2 into plans today are invested in target-date funds. In large part, this is because they are the top choice among plan sponsors as the Qualified Default Investment Alternative (QDIA) for automatic enrollment plans. These funds also fill an important role in most plan investment menus today as participants find them easy to use and understand. As more plans adopt and expand auto features, it is likely assets in these funds will continue to grow. 

Greater managed account use – As plan sponsors seek to make more options available that can help participants improve their retirement outcomes, plan managed account services are expected see greater use. Currently, one in three plans make these services available3 and, where offered, approximately 5 to 6 percent of participants invest in the managed account option. Managed account services are appealing because they go beyond the capabilities of automated investment options like target retirement date funds, and can deliver more comprehensive advice by taking a more holistic view of participants’ retirement strategy. In addition to automatic investment adjustments based on participant age, managed accounts can also make deferral rate recommendations and consider outside retirement assets and specific savings goals.

Fee-based services replace revenue share arrangements – As recent regulatory changes have increased the scrutiny of plan fees, the industry is shifting from commission or revenue share fee arrangements to a fee-based service model. While the regulation does not ban commissions or revenue sharing for advice, it does require advisers who use these methods disclose information about fees and conflicts of interest and have clients sign a best interest contract exemption (BICE). Thus, more advisors will likely adapt by using compensation methods that hold less risk of liability, such as a “level” compensation structure or billing clients a set fee.

These improvements in services and fee arrangements may ultimately result in a higher level of care for retirement plan participants – and better retirement outcomes. 

 

SOURCES

1 Brightwork Partners RSI Survey. June 30, 2017.

2 Source: Analysis of Retirement Insights Investment Database June 30, 2017.

3 Plan Sponsor Council of America (PSCA), December 2016.

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