The Department of Labor fiduciary rule is pushing more 401(k) plan advisers
to a fee-based model, but that shift is leading to an unexpected consequence: dark data.
Asset managers, also known as defined contribution investment-only providers, are unable to track payments to advisers because of this shift, and many of these fee-based plan advisers are finding it more difficult to get traditional support from DCIOs as a result.
Advisers have come to rely on provider support, especially from DCIOs, to run their practice. That includes running investment due-diligence reports, fee benchmarking and marketing efforts such as plan sponsor educational programs. The level of support often depends on how much business an adviser gives an asset manager.
Many advisers and distributors expected the DOL fiduciary rule to limit provider support because of the greater scrutiny on potential conflicts of interest, and have adjusted accordingly. The days of extravagant due-diligence trips to Hawaii are all but over, though some advisers are able to get support for more mundane activities like client meetings.
FEE-BASED PROBLEMS
Few systems of plan record keepers are able to track fee-based payments; they're programmed to track commissions. So, the move to fee-based payments, whereby the adviser gets paid a level fee, perhaps a percentage of assets under management, has left much of the payments to advisers "dark" on record-keeper systems.
(More: How did the DOL fiduciary rule change the world for 401(k) advisers?)
The age-old problem for DCIOs is the inability to trace investment trades back to individual advisers and retirement plans in a timely manner, which makes it impossible to properly compensate both their retirement and retail wholesalers. Omnibus trading established by record keepers means they send fund companies one trade order encompassing thousands of plans and many advisers. Fund companies don't even know which region of the country the trades come from.
But with commissions, DCIOs can tell how much of their investments overall a particular plan adviser is selling, despite the inability to track individual trades. The only way to efficiently track fee-based payments to plan advisers is through the record-keeper systems, where that data is essentially unavailable. When payments are made directly by plan sponsors, and not from plan assets, the situation is even more challenging for DCIOs.
(More: DOL fiduciary rule ups ante for monitoring of 401(k) record keepers)
EVOLUTION NEEDED
There are two overriding issues that highlight how the defined contribution industry needs to evolve:
• Many record-keeping systems are antiquated, based on decades-old technology. Any small changes can cause major disruption, and cost millions of dollars and months to institute. Due to margin pressure, record keepers only focus on technology changes that create new revenue sources or are required by law.
• Plan advisers need to wean themselves off relying on support from DCIOs, whether practice-management or marketing-related. With fees dropping and demand for services increasing, that evolution is very difficult for most advisers. Some advisers are already doing so, by moving revenue from DCIOs to advisory fees using index funds and collective trusts or custom products.
In the meantime, we live with the reality of inflexible record-keeping systems that are hard to change and extract data from, and of reliance by plan advisers on DCIO support. That's putting fee-based fiduciary advisers struggling to maintain their value and fees between a rock and a hard place — reliance on DCIO support but less ability to prove that they are using the DCIO's investments.
Fred Barstein is the founder and CEO of The Retirement Advisor University and The Plan Sponsor University. He is also a contributing editor for InvestmentNews
' Retirement Plan Adviser newsletter.
