New Opportunities for Advisors in DOL Retirement Plan Rules

Under pressure from Congress and the retirement plan provider industry, the Department of Labor (DOL) announced in September that it will re-propose its rule on the definition of an ERISA fiduciary. In the same announcement, DOL confirmed its commitment to a modified rule and indicated what the final rule will cover. Read DOL’s press release.

The re-proposed rule is expected to be issued in early 2012. It will work with new DOL cost disclosure rules, effective in 2012, to create opportunities for financial advisors. The DOL re-proposal will aim at the same sweet spot in the market as the cost disclosures—483,000 participant-directed retirement plans holding nearly $3 trillion in assets and covering 72 million participants. In these plans—which include 401(k)s, 403(b)s and SIMPLEs—employees choose their own investments from employer-approved menus.

DOL’s re-proposal will strengthen the “Chinese Wall’ that exists under ERISA’s prohibited transaction rule (Section 406) between retirement plan investment advice and investment management services. It will expand your opportunity to deliver objective fee-based advice as a fiduciary to participants, and you also may serve as participants’ advocate by encouraging employers to offer broader, better and more cost-effective plan investment choices.

How badly do participants need objective investment advice? The answer is visible in one trend—the percentage of participants who auto-enroll in their plan’s default investment choice (usually a target date fund) and then don’t bother evaluating other choices. According to the Employee Benefits Research Institute (EBRI), among all participants who auto-enrolled in target date funds in 2007, 95.7% were still using them in 2009. You can access results of this new EBRI study.

Target date funds never did fit the risk tolerance of many plan participants, mainly because they are too stock-heavy for young investors who want to preserve capital. Sticking with any default investment choice over a year or more indicates inertia, lack of investment confidence, and lack of knowledge—if not neglect.

As a fee-based advisor, you can help self-directed plan participants explore the range of possible investment strategies, as well as their potential to defer more money into the plan and reduce plan investment costs. You then can continue to serve as their personal and plan advisor over time, capturing rollover opportunities as they occur.