Cerulli Associates, the global analytics firm, does not anticipate a significant slowdown in rollover activity in the foreseeable future as a result of the Department of Labor’s (DOL) “Conflict of Interest” rule. The primary concern of the DOL’s proposal is to expand the definition of fiduciary to cover more instances of providing advice. This expansion, in turn, is designed to protect consumers from sales practices that may be tainted by a conflict of interest. The DOL’s April 2016 proposal creates a new type of prohibited transaction exemption, referred to as the Best Interest Contract Exemption (BICE), which is a contract that the investment advice provider must present to a potential client. Specifically, the financial institution must disclose any variable compensation that the advisor receives for the advice and resultant product sale, and comparative examples of compensation they would have received for other products.
While the Conflict of Interest rule creates risk for the retirement industry, investors’ relationships with advisors, shortcomings in defined contribution (DC) plan design regarding distributions, and a lack of in-plan guaranteed retirement income products will prevent the erosion of individual retirement account (IRA) rollover flows. First, rollovers most commonly flow to existing relationships and the largest rollovers go to financial advisors. Thus, large balance rollovers will continue to flow to existing advisory relationships as investors value the consolidated view of assets and comprehensive planning-based advice. Their relationship with their advisor supersedes questions about the BICE. Even before the DOL announcement, broker–dealers (BDs) with large advisor forces were adapting their businesses away from commission and proprietary products to fee-based, fiduciary business models. The industry may continue to see low-end consolidation of advisors and BDs not equipped to deal with sweeping regulatory changes, but in the long run, firms of scale will continue their business with relatively little disruption.
Second, some DC plans are not designed to accommodate partial withdrawals from separated or retired participants. Therefore, at retirement, it may be in an investor’s best interest to roll over their accumulated retirement balances to maintain maximum flexibility in retirement income planning. The current inflexibility regarding withdrawals in some DC plans for retired participants is one more reason Cerulli Associates is optimistic about future rollover activity. Only 10 percent of plans allow participants to take ad hoc partial distributions. Investors reported that the flexibility to make additional withdrawals, beyond a monthly remittance, was the most attractive element of a retirement income plan. Until retirement income options become more readily available inside DC plans, IRAs will continue to be the primary consolidation vehicle for retirees, regardless of an evolving regulatory environment. While interest and willingness to discuss in-plan retirement income products are growing, obstacles remain to more widespread adoption.
The requirements of the DOL’s Conflict of Interest Rule will ultimately lead to evolution of products and platforms. Large BDs will use developing technology to serve smaller accounts on a flat-fee basis. Insurance companies will be forced to lower variable annuity expenses and commissions to be in line with other financial products.
The true impact of the DOL’s Conflict of Interest Rule may not be immediately felt, but it will lead to a period of product and platform innovation at BDs and manufacturers. Cerulli Associates expects there will be unexpected changes to the retirement and wealth management industries and, to a degree, this cultural evolution is what the rule is hoping to effect.