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Fiduciary Rule Set to Trigger Surge in Fund Reviews

A new report claims that the Labor Department’s fiduciary rule will cause a surge in mutual funds being reviewed and replaced in DC retirement plans, even before the Jan. 1, 2018 deadline for full compliance.

Before the rule goes into effect, one-third of financial advisors who counsel DC plans already plan to make changes to mutual funds used in their clients’ DC plans in 2017, while another 9% say they are likely to make such changes, according to research from Ignites Retirement Research.

That’s because 55% of the DC plan advisors surveyed by Ignites either plan to or are very likely to review the mutual funds used in clients’ DC plans before the fiduciary rule takes effect. About 45% already plan to conduct review of mutual funds used in DC plans (1 out of 10 say they are very likely to do so), while 4 in 10 are already planning to conduct a review of DC plan service providers (with 14% very likely to do so).

Some 26% of plan advisors surveyed in the report expect index equity mutual funds to be the top winner in DC plans in the aftermath of the implementation of the fiduciary rule. (Ignites says this makes sense because actively managed funds are on average more expensive than index funds.) For similar price reasons, 23% of plan advisors plan to increase their use of products mixing active and passive strategies.

Among the products likely to be hurt by the fiduciary rule, 8% of plan advisors expect to scale back their use of variable annuities, most of which sell on a commission basis and therefore represent potential conflicts of interest under the new regulations, while 7% of plan advisors expect to reduce their use of actively managed equity mutual funds in DC plans.

Ignites Retirement Research surveyed 251 elite plan advisors with an average of $770 million in DC assets under management. Already, 50% of these advisors say they are busy scheduling meetings with plan sponsors about the impact of the rule and reviewing investment products (strategies, investment vehicles, fee structures, share classes) in DC plans, while another 17% of these advisors are very likely to meet with plan sponsors before the fiduciary rule’s final deadline.