New research by Cerulli Associates finds that more than two-thirds (70%) of retirement specialist advisors say participants in their defined contribution (DC) plans frequently ask them questions about individual retirement account (IRA) rollover decisions.
But given the existing and proposed regulatory guidance addressing advisors’ fiduciary responsibilities, are advisors more or less likely to recommend rollovers. In The Cerulli Edge—U.S. Retirement Edition, 4Q 2023 Issue, the firm takes a deeper dive into what some of the possible implications could be.
The issue arises as wealth management firms continue to pursue opportunities in the ERISA-covered retirement plan space. While there are some advisors who focus almost exclusively on advising workplace retirement plans, most have at least some wealth management clients in their book. In fact, the report notes that the vast majority of advisor-intermediated rollovers go to existing advisor relationships—as opposed to new advisor relationships.
To that end, Cerulli notes that nearly 6 in 10 (57%) retirement specialist advisors say IRA rollovers from their DC plan business help grow their wealth management business. What’s more, nearly two-thirds (63%) of the $845 billion in assets rolled over from DC plans in 2022 were rolled into IRAs with the assistance of a financial advisor.
This, according to Cerulli, underscores the importance of establishing relationships with participants prior to major rollover events, such as retirement.
New and Existing Guidance
As most industry stakeholders are likely aware, the Department of Labor (DOL) proposed a new fiduciary rule titled Retirement Security Rule: Definition of an Investment Advice Fiduciary that would replace the established five-part test for determining whether an advisor should be subject to ERISA.
Among other things, the proposed guidance would loosen the “regular basis” prong of the five-part test to include advisors who provide retirement advice on a regular basis as part of their business—rather than considering the “regular basis” condition within the context of an advisor’s relationship with the end-investor. As such, the proposal, if finalized, would greatly expand the application of ERISA fiduciary standards, particularly regarding one-time IRA rollover recommendations and IRA owners, the report emphasizes.
Meanwhile, the proposed “retirement security” rule comes less than two years after the DOL began enforcing new prohibited transaction exemption requirements in 2022 (PTE 2020-02). To comply with PTE 2020-02, advisors must document why a rollover is in the best interest of the participant when there is a conflict of interest.
For advisors, this additional documentation process “can be cumbersome and time-consuming,” the report observes. In fact, one advisor tells Cerulli, “For the first time, we’re just saying ‘keep it in the plan’ when it comes to the smaller accounts… even if you get the rollover, it’s going to deter where you can put the rollover…particularly when it comes to variable annuities with all the riders since they’re so expensive.”
According to Cerulli’s research, nearly a third (30%) of retirement plan advisors indicate that the PTE 2020-02 requirements make them less likely to recommend an IRA rollover from a DC plan with less than $50,000. For balances above that amount, however, advisors appear to be more willing to consider rollovers, the research further shows.
“If enacted, Cerulli would not expect this regulation to have a meaningful impact on higher rollover balances if these balances (and clients’ household wealth) make it worthwhile for advisors to take on the added regulatory scrutiny,” stated Shawn O’Brien, director at Cerulli.
Alternative Solutions
Note also that some firms have come to market with solutions to help advisors streamline this documentation process to inform rollover recommendations, the report further observes. In addition, home office teams at large firms (e.g., wirehouses, aggregators) may offer their advisors other tools to help them streamline this documentation process.
Alternatively, the advisor could work with the participant in a financial planning or wealth management capacity but without directly managing the assets held away in the DC plan, Cerulli notes. In the latter scenario, some advisors and advisory firms are evaluating Pontera (formerly FeEx), a technology that allows advisors to manage clients’ held-away assets, as a potential tool. The report notes that Pontera has partnered with several advisory firms in the wealth management space, including Carson Group, OneDigital, and SageView, and recently announced a new integration with Envestnet’s Tamarac platform.
At the end of the day, however, the argument for whether participants should leave their retirement assets in an employer-sponsored retirement plan or roll them into an IRA is highly dependent on the participants’ circumstances and the features of the employer-sponsored plan, Cerulli further emphasizes.
“Considering the body of guidance over the years from DOL, I cannot readily picture a solution that strays from holistic consideration of the participant’s financial profile,” observed Allison Wielobob, Chief Legal Officer at the American Retirement Association. “The Department has several times in the past described the importance of advisers’ familiarity with participants’ entire financial picture when considering rollovers. It will be interesting to see what alternative tools may develop in this space.”
