Tougher 401(k) rules seen as ‘full employment act’ for RIAs

As the Labor Department prepares to issue stricter rules for the retirement fund industry, financial advisers at RIA firms are licking their chops over the prospect of poaching business from broker-dealers and insurance agents

As the Labor Department prepares to issue stricter rules for the retirement fund industry, financial advisers at RIA firms are licking their chops over the prospect of poaching business from broker-dealers and insurance agents.

One of the beefed-up rules, still being debated, would expand a fiduciary duty to all those who advise a plan. Another change, set to go into effect Jan. 1, would improve disclosures. Registered investment advisers, however, already are seeing a bump-up in 401(k) business.

“We’re up about 20% over the last 12 months as clients get ready for these new regulations,” said Randall Long, founder and managing principal of SageView Advisory Group LLC, which serves retirement plans holding $13 billion in assets. “They certainly want to engage a fiduciary adviser.”

The Labor Department’s changes are like a “full employment act for us,” Mr. Long said.

Other RIAs echoed that sentiment.

“We’ve brought in probably $40 million over the last four or five months” in retirement plan assets, said John Nowicki, president of LCM Capital Management Inc., which has about $120 million under management.

He said his firm recently hired another professional with a background in the retirement plan market to help build the business.

“We may go from about $10 million to $80 million in 401(k) assets in a year,” Mr. Nowicki said.

RIAs have about 25% of the 401(k) market, said Mike Alfred, chief executive of BrightScope Inc., a software company that analyzes 401(k) plans.

But the Labor Department’s proposal to eliminate a rule that exempts plan advisers from fiduciary liability if they don’t provide continuing advice, and another that would ramp up the disclosure of costs, could increase that percentage.

The 401(k) market “is completely coming to [RIAs] because they’re already disclosing fees and acting as fiduciaries in making investment selections” for plan sponsors, Mr. Alfred said.

Advisers said that revenue-sharing and 12(b)-1 fees paid by mutual funds to bundled plan providers are poorly disclosed and that company sponsors and participants rarely know what their total costs are. Some clients think that they pay nothing.

Added price disclosure could generate some headaches for insurance agents.

“The old group annuity contracts will have to be revamped and re-priced,” said Peter Ponzio, managing member of Longview Financial Advisors LLC, which handles about two dozen 401(k) plans with a total of $120 million in assets.

Indeed, Mr. Nowicki thinks that advisory firms such as his have a cost edge over insurers. That edge will become more apparent with the new Labor Department regulations, he said.

Group annuities, which are a commonly used bundled product, run more than 2% plus soft dollars, Mr. Nowicki said.

“We’re typically all-in at 1.3%” for a small plan, he said. “The [insurance company and agent] infrastructure just won’t allow them to compete with us.”

RIAs have another leg up. Sponsors of 401(k) plans are growing more concerned about their own liability and increasingly are seeking out advisers who will take on a fiduciary duty explicitly.

[More: RIAs should pursue 401(k) plans]

Plan sponsors “want the acknowledged fiduciary status and they want [their advisers] to be independent,” Mr. Long said.

“It’s a sharing of liability,” he said. “It helps them mitigate risk.”

Wirehouse brokers who handle just a few plans might be hard-pressed to hang on to them, Mr. Long said.

“Wirehouses … won’t let their advisers acknowledge fiduciary status, so it’s really created a great opportunity to move in and serve in that role,” he said.

For his part, Mr. Alfred thinks that wirehouses might end up limiting 401(k) plan business to a select group of brokers who are allowed to accept fiduciary duty.

At the same time, custodial firms are racing to offer more low-cost index fund options on their 401(k) platforms, driven in part by a desire among advisers to see lower investment costs.

The Charles Schwab Corp. this year will launch a 401(k) plan using all index funds and next year plans to roll out an ETF-only plan.

And last month, TD Ameritrade Inc. announced the availability of exchange-traded funds on the 401(k) platform offered to advisers.

“We’ve probably seen maybe 15% to 20% of our adviser base looking at or making some sort of movement toward 401(k)” business, said Greg Vigrass, president of Folio Institutional. “Clearly, some of that is in anticipation of the DOL changes.”

COMPLEXITY

Advisers who think that they can add a retirement plan or two to an individual client practice should think twice, however. Observers said that part-time operators will find it increasingly difficult to keep up with complex rules.

“By the time you learn how to behave, you’re going to have invested a lot of time in it,” said C. Frederick Reish, a partner at Drinker Biddle & Reath LLP specializing in the Employee Retirement Income Security Act of 1974.

“The new [regulations] are giving us a lot of opportunities to educate plan sponsors and to weed out people who really can’t be in it anymore,” Mr. Ponzio said.

E-mail Dan Jamieson at [email protected].