New fee transparency rules for defined-contribution plans are likely to create both more competition and compliance headaches for brokers who advise the plans.
Combined with a regulatory push to raise standards and reduce conflicts of interest for plan advisors, the changes may force some brokerages, and some of the advisors who work for them, out of the retirement plan business.
New disclosure regulations from the Department of Labor meant to make it easier for employers who sponsor retirement plans to assess their contracts with service providers go into effect Jan. 1, 2012. Those meant to make it easier for plan participants to evaluate their plans are set to become effective for plan years beginning Nov. 1.
The proposed regulations will require that advisors to retirement plans detail all plan sponsors they have relationships with and the nature of the payment agreements in place. Brokers also must document the varying pay arrangements they have with different mutual fund companies, and must disclose any possible conflicts of interest.
Meeting those requirements won't be easy for brokerage firms.
"Broker-dealers are having a hard time getting all the information organized," said Leslie Prescott, a consultant on retirement issues at Financial Research Corp., a consulting firm. "They generally sell lots of different plans and a lot of different investment types and, in many cases, they don't even have a relationship with the plan sponsor. It's a huge headache."
Major brokerages with important retirement plan businesses will find a way to comply, she said, but those for whom it isn't a key source of revenue, including smaller firms, may decide to drop out. "The large broker-dealers, like LPL [Financial] and Raymond James [Financial], they're not going to get out of the retirement business," she said. "But the smaller ones are going to be thinking about what percentage this is of their business, and does it make sense to keep on going."
Prescott based her conclusions on an analysis of retirement-plan information from BrightScope Inc., an independent rater of 401(k) plans; FRC's own database, which contains performance and other related mutual fund information; and various third-party studies.
Defined-contribution plans will be required to provide quarterly disclosure to participants of the administrative fees they're paying at the plan level, as well as fees for the underlying investments. Expanding disclosure requirements, media attention on fees and evolving economics are causing plan sponsors to focus on cutting plan costs, putting pressure on smaller broker-dealers less able to trim margins, FRC says.
Total costs paid by plan participants as a percentage of assets vary significantly with plan size. For the smallest plan groups, the average cost paid by participants as a percentage of assets was more than three times those of the largest plans, Prescott said.
Regulators are moving toward a requirement that plan advisors be fiduciaries, obliged to always act in clients' best interests. This could lead some brokerages to be more selective about which advisors are allowed to work with retirement plans, based not just on their knowledge and skill, but on whether they have enough retirement business to justify the cost of ongoing training, Prescott said.
Bo Bohanan, director of retirement plan consulting at Raymond James, agrees that some brokerages may rethink which advisors can handle the plans. "Some may not do it, some may do it on a very, very limited basis, some on a limited basis and some on a case-by-case basis," he said. "At Raymond James, we've always looked at this on a case-by-case basis."
A few broker-dealers may choose to leave the business altogether, and nonspecialists won't be able to retain and compete for larger retirement plans, Bohanan said.
