Brand Trust Dominates IRA Rollover Decision

Fees are often thought of as the prevailing factor in most retirement investment decisions, but new research suggests the destination of an IRA rollover is determined by more subtle considerations. 

The latest “Cogent Reports: DC Participant Planscape” analysis published by Market Strategies International suggests brand trust strongly outweighs all other factors involved in the individual retirement account (IRA) rollover selection process—even fees and investment performance.

The study found that “trustworthiness is the No. 1 factor across all generations for defined contribution (DC) plan participants when considering where to invest their former DC plan assets.” In fact, brand trust becomes more important as participants age, underscoring the need for providers to foster deep relationships over time, the report suggests.

“The concept of brand trust is particularly riveting because it signals both a massive opportunity—and threat—to financial services providers,” says Sonia Sharigian, senior product manager and report author at Market Strategies. “When rollover triggers like a job change or a desire to consolidate assets arise, firms that have successfully built long-term brand loyalty will be well positioned for future asset retention, while providers that have not cultivated a sense of trust and loyalty among their current or former plan participants will be at a sizable disadvantage to keep those assets in-house.”

According to the study, “It’s a brand I trust” is cited by one-third (35%) of plan participants likely to open a rollover IRA in the next 12 months when they’re asked for the primary reason they would select a particular firm—nearly 50 percentage points higher than the next-leading factor, “It’s my current plan provider,” reported by one-quarter (24%) of participants.

The study also points to brand reputation, financial stability, low fees, easy rollover process, service and support, and investment performance as “secondary influencers in rollover IRA provider selection.”

“For years we have seen fees and investment performance serve as a leading factor in the rollover decision for investors,” adds Linda York, senior vice president at Market Strategies. “We are finding that trust is increasingly a larger factor in the decision-making process—which is likely fostered by some of the missteps that have not put the investor first for a number of asset managers over the past few years.”

NEXT: Impact of the fiduciary rule on IRAs

According to the report, providers highly associated with the brand attribute “is trustworthy” include Fidelity, USAA, Vanguard, Wells Fargo and American Funds, “a notable achievement considering these companies earned top 10 rankings for rollover provider consideration for the second year in a row.” Other firms mentioned by name include TIAA, Empower Retirement, Charles Schwab, Thrivent, and J.P. Morgan Chase.

As the report and other recent research shows, IRA providers and their adviser-distributors are hard at work assessing how the Department of Labor (DOL) fiduciary rule reform may impact their work. To put it simply, under the new rule, if a participant takes advice and rolls over a distribution to an IRA, and an adviser will then earn a fee in the IRA that he or she would not have earned but for the recommendation, that fee constitutes a prohibited transaction. This is because the adviser, in the eyes of the DOL rulemaking, used his or her fiduciary status to trigger additional compensation.

The good news is that there is an exemption from the prohibited transaction—the best interest contract (BIC) exemption for level-fee fiduciaries. To qualify for this exemption, the firm and any affiliates it may have would need to receive a level fee, such as a percentage of assets or a specific dollar fee, disclosed in advance. The firm and adviser would also need to acknowledge fiduciary status in writing; abide by “impartial conduct” requirements; and, if the transaction is a rollover from a plan to an IRA, document why making it is in the participant’s best interest.

If one is not a level-fee fiduciary for the IRA, the adviser then needs to satisfy even stricter BIC exemption requirements. These additional requirements include adoption of extensive disclosures and warranties as well as policies and procedures to identify and mitigate conflicts of interest. Also, if the recommendation is to invest in an IRA, the firm would need to agree that both it and the adviser will adhere to these standards in a contract that is enforceable by the IRA owner.

These requirements will undoubtedly increase the complexity of the rollover sales and service process from the providers' perspective, the research concludes, but they should also be encouraged by the sizable demand that will persist for rollovers for years to come, given the accelerating retirement of the Baby Boomer generation. It's an environment in which innovative thinking and brand trustworthiness will help firms thrive.

More information on Cogent Reports research from Market Strategies International is available here.