The Department of Labor’s final fiduciary rule will save retirement investors as much as $87 billion dollars through reduced fees and annuity rollovers over the next 10 years, two senior Morningstar researchers said in a new report.
Because of the new rule, “retirement plan participants would save $55 billion over the next 10 years in fees, and investors rolling over into annuity products could save another $32.5 billion over the same period,” said Spencer Look, associate director for the Morningstar Center for Retirement & Policy Studies, and Lia Mitchell,, a senior analyst of policy research for Morningstar.
The researchers said they expect the rule will trigger significant reductions in fees and commissions.
“We believe this rule will have significant benefits for ordinary investors,” the researchers said.
The rule redefines and greatly expands who qualifies as a fiduciary under the Employee Retirement Income Security Act and clarifies when financial professionals must act in the best interest of their client.
The intent of the rule is to limit conflicts of interest and close loopholes, the researchers said. For example, the DOL rule will for the first time apply fiduciary requirements when a professional advises an investor on a one-time basis to roll their assets from retirement plan into an IRA to buy mutual funds or an annuity.
Investors in small retirement plans and investors rolling assets into a fixed annuity are likely to reap the greatest cost savings from the new rule, the researchers said.
Overall, plan participants should save more than $55 billion in the first 10 years and more than $130 billion in the subsequent 10 years, with 80% of the benefits going to the nation's 20 million small plan participants, the researchers estimated.
Average costs for workers covered by a small plan would be greatest and would drop to 75 basis points from 93 basis points, the researchers said. As Morningstar reported in its 2023 Retirement Plan Landscape Report, participants in small plans with less than $25 million in assets pay nearly twice as much as participants in larger plans and also have a much higher range of fees, “which suggests many plans pay unreasonably high fees,” the researchers noted.
Advisors who help plans build their investment lineups—considered fiduciaries under the new rule—will also need to ensure their recommendations are prudent and their fees are reasonable.
Plans that currently have significantly above-average costs are unlikely to meet the new DOL standards, the researchers warned. Across all mutual funds and exchange-traded funds, the asset-weighted average net expense ratio that investors pay is just 0.37%, but small plan net expenses are much higher.
“We do not believe that, even with administrative expenses, any U.S. plan or its fiduciary would feel comfortable maintaining a plan with more than, say, 100 basis points in fees to participants, given how common it is to pay much less,” Look and Mitchell said.
Investors who are advised to roll assets into fixed index annuities—newly covered in the rule—will also reap significant savings of over $32.5 billion in the first 10 years and more than $32.5 billion in the subsequent 10 years, the researchers said.
Although most fixed-index annuities do not report explicit fees, the investor still pays in the form of lower returns (credited interest rates) and often substantial surrender fees, they said.
When the new rule goes into effect, the researchers think insurers will decrease surrender fees and fixed-index annuity commissions. “This will result in lower implicit costs, leading to better returns for investors,” they said.
“We expect these rules to bring about substantial benefits to retirement investors, but they will not materialize overnight. The first challenge will be overcoming lawsuits,” Look and Mitchell said.
The first lawsuit challenging the rule was filed in early May by the insurance industry trade group Federation of Americans for Consumer Choice (FACC), which is asking a federal court for an injunction and to vacate the rule.