File this under the category of unintended consequences: On the one hand, the DOL conflict-of-interest regulation could create more orphaned plans without an advisor, while at the same time probably making it more difficult for record keepers to assign these plans to an appropriate advisor.
The DOL rule could accelerate the shift of DC plans from so-called “emerging” advisors — those that dabble in the market — to those that are true experts, a movement that has been underway for the past decade. At the same time, the number of advisors managing a DC plan or getting paid through a referral has increased from 150,000 prior to the 2008 recession to 250,000 now — a figure that could increase due to state-mandated plans. Larger plans are more likely to use an expert, but smaller plans have a harder time attracting one.
Emerging advisors might ultimately be forced to exit the market because they cannot or will not act as a fiduciary under the expanded definition, or because it might jeopardize their IRA rollover or wealth management business. Some broker/dealers may force some advisors out of serving the DC market, with some hoping to reassign the plans to advisors able to act as a fiduciary.
One dirty secret in the DC record keeper world is that even those providers that purport to sell only through advisors have orphan plans, either because they used to sell direct or because the advisor has technically or practically abandoned the plan. If the advisor has not called or visited a plan in over a year or more, should they get paid or be considered to be actively engaged?
Providers might be tempted to assign these growing number of orphan plans to advisors they work with, and while some advisors might complain that they don’t have enough capacity to take on a lot of smaller plans, most are willing to try to figure it out.
But under the new DOL rule, some legal experts suggest that referring an advisor might be a fiduciary act. Record keepers will do almost anything not to be considered a fiduciary. How likely is it that their legal departments will risk liability through referrals?
Solutions? Providers can refer the plan to the abandoning advisor’s BD, or they can refer it to an unbiased RFP process. Either way, the issue is likely to grow — and can’t be ignored.
