Shipman anticipates that fixed annuities may be utilized more frequently in the retirement setting, given that variable annuities and fixed index annuities will now be subject to best-interest-contract exemption requirements. Another factor he expects to impact this, he says, is the ongoing focus on fees across the industry.
He also thinks it will burden registered reps to manage tax-free retirement accounts at a fiduciary level while still being permitted to manage taxable accounts using a suitability standard (the less onerous standard for advice). This “split-loaf situation” he says, will be hard to explain to clients and will require very careful record-keeping and thoughtful preparation. Any mention of retirement in a client meeting (IRAs included) will require the tougher fiduciary standard.
Shipman isn’t suggesting that advisors will act inappropriately when they’re not bound by the fiduciary standard. But the relationship will need to be developed carefully at the point of sale, he says.
Whether a firm will do fee-based business or give some advisors more flexibility to transact business with DOL exemptive relief, “there’s almost an incomprehensible number of combinations and permutations of what firms will do,” he says. Still, he expects to see more business transactions become fee based and advisors move away from commission-based business.
Shipman anticipates more segmentation of business as firms dispensing retirement advice determine whether it will be cost-efficient to keep up with their small-balance retirement clients. “Robo-based solutions may well have their moment in the sun as a result,” he says. He points out that when the U.K. ratcheted up its fiduciary requirements a few years ago, account minimums rose and smaller investors started scrambling more for passive investments.
Shipman also predicts there will be more consolidation among small and midsize firms that find the fiduciary rule too complex and want to link arms with others to spread out the costs of compliance, record-keeping and general implementation burdens.
Gearing Up
Michigan-based Rehmann Financial is also trying to digest the new fiduciary rule. It advises on $2.7 billion of assets for approximately 375 retirement plans, about $2.4 billion of which are in 401(k) plans, and provides third-party administrator services for 900 plans.
“We’re a firm that has a lot of moving parts, and this thing is going to touch us in so many different ways,” says Gerald Wernette, a principal and the director of retirement plan consulting services for Rehmann Financial. He’s looking at the rule from the perspective of a registered rep, an RIA, an advisor working with many rollovers, and a third-party administrator whose advisor clients manage just a couple of retirement plans.
“No matter what comes out of this, the scrutiny on retirement plans is going to be dialed up,” he says. Rehmann Financial is reviewing its processes and has built what Wernette calls a “centralized support services team” to help provide a streamlined, consistent model for serving all its retirement-plan clients. This internal team does “a lot more heavy lifting,” he says, for advisors managing few plans.
Rehmann Financial, which at a minimum takes on the role of being a 3(21) fiduciary advisor for all its retirement plan business, has been talking a lot more to clients about the importance of being a fiduciary, says Wernette. He’ll be looking closely at the new rule for guidance on participant education. “The DOL is going to draw a line when it comes to education versus advice,” he says.
He’ll also be paying close attention to new requirements for rollovers. “It’s an issue for any advisors that do rollovers that are coming out of any retirement plan,” he says.
Rehmann Financial has developed procedures and disclosures to ensure that advisors find the best options for investors and don’t force them to roll over assets from retirement plans that offer low fees and good access to investment choices.
“I think you’re going to have a lot of advisors who work with a couple of plans say, ‘Forget it, I’m done, I don’t want to mess with this stuff,’” says Wernette. He doesn’t expect the rule to affect many large retirement plans because their advisors and plan sponsors are often fiduciaries. It’ll be a bigger issue for smaller plans, he says.
As a result, he expects to see growing interest in state-based retirement plans within the private sector and in multiple-employer plans (MEPs). Rehmann Financial rolled out its first MEP this year.
Wagner describes the fiduciary rule as probably the most significant piece of legislation the Labor Department has crafted since the beginning of ERISA. “This is going to be the law of the land,” she says, although people may still challenge it. As Wernette says, “We have to figure out how to live with it.”