Fiduciary Rule Will Impact Business Practices

A white paper from DST kasina LLC details how the DOL’s fiduciary rule could affect asset managers.

“Positioning Asset Managers to Capitalize on Opportunities Created by the DOL Fiduciary Rule” aims to help the asset industry understand how key rule changes might provide new opportunities to address the needs of fiduciaries that provide fee-based advice.

The DOL’s rule (now with the Office of Management and Budget) if implemented as proposed, would redefine fiduciary roles and responsibilities for the advisory business while expanding transparency on fees and advice on retirement saving, the paper contends.  

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According to Julia Binder, head of strategic marketing research for DST kasina and the paper’s lead author, the rule will likely accelerate existing trends in financial services, such as the use of automated advice providers, the move from higher-cost actively managed products to lower-cost passive investment products, and the shift from commission-based to fee-based accounts. 

Steven Miyao, president, DST kasina, says that whether advisers build automated advice into their practices depends on the client base they are serving and whether automated advice is something that plan participants are receptive to. “Many plan participant websites already feature automated aspects, for example, to increase the percentage that is contributed for retirement funds, to see what happens if a loan is requested and so on,” he tells PLANADVISER.

“Automated advice is part of the online experience for many of us today, whether we are purchasing a home, an automobile, etc. We expect automated advice to proliferate in retirement planning, too.”

“If passively managed funds meet the requirement that they are in the client’s best interest, advisers may recommend them,” Miyao says. “But there is a role for actively managed products, too, and there will likely be situations where a case can be made that they are in the client’s best interest.”

NEXT: Financial advisers are the go-to source for rollover info.

The paper notes that financial advisers were the most common source of information for investors researching the decision to roll over money from their former employer’s retirement plan into a traditional IRA. Sixty-one percent of traditional IRA-owning households consulted a financial professional for advice. The proposed regulations will likely govern any recommendation to roll money out of a qualified plan, and the investment advice provided once a rollover is completed. The rules should apply to plan advisers who work with individual participants, and to independent advisers—unaffiliated with the plan or sponsor—who are advising clients on their retirement rollovers.

In addition to key questions that a firm’s DOL working group should consider with regard to distribution, marketing, operations and product strategy, the DST kasina white paper includes recommendations for: distribution, marketing, operations and product strategy. Considerations include how an organization will adapt to new disclosure requirements; prohibited compensation models; expanded regulatory authority over financial advice to retirement accountholders; and rethinking call center support, among other topics.

Miyao says the rule may not have much impact for the service models of many retirement plan advisers. “Many already adhere to the fiduciary standard,” he points out. The rule requires advisers to learn all they can about their client’s needs, have a rigorous process to identify investments that meet the client's needs and are in the client’s best interest, and have a robust process to monitor those investments. “The DOL rule will ensure that they all do.”

“The final rule will cause short-term disruption for firms that are not already anticipating and responding to key industry trends,” Miyao says. Those firms that proactively manage their product strategy, distributor relationships, technology infrastructure, and communications are the ones that will thrive during times of significant industry change.

DST kasina’s “Positioning Asset Managers to Capitalize on Opportunities Created by the DOL Fiduciary Rule” white paper can be downloaded free from DST kasina’s website.

Debt, Education Expenses Hindering Retirement Savings Progress

In addition, about one-quarter (27%) of surveyed Americans say the main factor preventing them from saving for retirement is high day-to-day expenses.

The ninth annual America Saves Week survey has found that only two-fifths (40%) of U.S. households report good or excellent progress in “meeting their savings needs.”  

Less than half (49%) say they are saving at least 5% of their income; 52% say they are saving enough for retirement with a “desirable standard of living,” 43% report some kind of automatic saving outside of work, and 38% report they have no consumer debt.

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Responses to other questions, however, suggest that around two-thirds of Americans are making at least modest savings progress: 70% report at least some progress in meeting savings needs; 66% say they save at least some of their income; and 63 percent report “sufficient emergency savings to pay for unexpected expenses like car repairs or a doctor visit.”

More Men Than Women Report Saving Progress 

On 12 separate questions on various financial well-being indicators, men’s responses were more positive than women’s responses, with differences ranging from five to 13 percentage points.  For example, 74% of men, but only 67% of women, report they were making saving progress, and 44% of men, but only 36% of women, report good or excellent saving progress.

Similarly, 72% of men, yet only 60% of women, report they are spending less than income and saving the difference. This gender gap persisted for those saving at least 5% of income—54% of men and only 45% of women.

During a media call, Stephen Brobeck, executive director of the Consumer Federation of America and a founder of America Saves, said these gender differences were not surprising because men tend to have more income and assets than women.

NEXT: Retirement savings shortfalls

When the survey asked whether respondents were "saving enough for a retirement in which you will have a desirable standard of living," only about half of non-retired persons (52%) said "yes." That figure is down three percentage points from last year (55%) and down six percentage points from 2008 (58%).  Moreover, there was a significant gender gap: 57% for non-retired men, and 47% for non-retired women.

While these findings are discouraging, Harry Conaway, chairman of the American Savings Education Council, told reporters the positive could be that as individuals become more educated and begin planning, they grow more realistic about their retirement savings needs.

For those non-retired persons who say they are not saving enough for retirement, about one-quarter (27%) say the main factor is high day-to-day expenses, and another one-quarter (25%) say the main factor is debt and related expenses, with about half this group (12%) citing education expenses and debt.  For those younger than 45, 22% cite education expenses and debt as the main reasons for not saving enough. For those older than 45, the most cited reason (16%) after day-to-day expenses is mortgage or housing expenses.

For the first time, the annual America Saves Week survey asked for respondents’ views about participating in retirement programs. When asked the highest percentage of their salary that they would contribute to a plan offered by their employers with auto-escalation, more than four-fifths (82%) indicated they would contribute more than 3%, with 40% indicating they would save 10% or higher. 

Conaway says this suggests more employees would be open to automatic enrollment and automatic deferral escalation than retirement plan sponsors think.

Also, when asked what they would do if their employer did not offer a retirement plan and they were automatically enrolled in an IRA administered by their state government with a default annual contribution of 3%, roughly equal percentages said they would contribute less than 3% (32%), 3% (31%), and more than 3% (28%). 

NEXT: Those with a plan for saving are more successful

The survey findings reveal that those with a “savings plan with specific goals” save more successfully than those without a plan. Sixty-one percent of those with a plan for savings know their net worth, versus 33% without a plan. Eighty-five percent of those report no or reducing consumer debt, versus 64% without a plan. Eighty-four percent of those with a plan say they are spending less than income and saving the difference, versus 46% of those without a plan.

In addition, more of those with a “savings plan with specific goals” report sufficient emergency savings than those without a plan (79% vs. 46%); automatic savings outside work (60% vs. 26%); and making good or excellent savings progress (55% vs. 23%).

Income appears to be correlated with some but not all of these differences. More specifically, the financial well-being indicator gaps between those who plan and do not plan are always larger than those gaps between households with annual incomes of $25,000-$50,000, and those households with incomes above $100,000.

Brobeck said there is hope; he suggests low-income workers be encouraged to start with saving their loose change. And, he says, all households can save more with a specific plan and goals.

“The survey responses underscore how important it is for all retirement industry players and policymakers to educate employees and support key savings goals,” Conaway concluded.

The research included responses from a representative sample of 1,004 adult Americans between January 28 and 31.

More about America Saves Week, including a toolkit, can be found at http://www.americasavesweek.org/.

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