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AdvisorNews - April 2015

Can Dabblers Exist in the DC Market

Posted By NIPA Headquarters, Monday, August 25, 2014

By Fred Barstein

Can dabblers survive in today's complicated DC world? While many experts think that advisors must specialize to do well in the 401(k) and related retirement plan markets, there’s a lot of evidence that many advisors with plans under management do not specialize, nor do they intend to.

Cerulli estimates that only 8% of all advisors specialize, but that’s still 24,000 advisors. And Aite Group states that 50% of all advisors have 10 or more plans, according to an article in Financial Advisor IQ. There’s no doubt that the proposed DOL fiduciary rule would make it harder for dabblers, many of whom will need to be fiduciaries, while disclosure regs have helped to lower fees. But does that mean advisors need to specialize?

It may be self-serving for specialty firms to aver that there is no room for dabblers in the DC market. That might be true for mid-size and larger plans, but there’s clear evidence that many advisors use DC plans to develop relationships with the company and their employees to cross-sell other services.

Some purists believe that there’s an inherent conflict for an ERISA fiduciary to sell, for example, wealth management services to the company’s executives, but it’s done all the time. One national insurance broker dealer claims that 90% of all their reps get paid on a DC plan, while new research is showing that many more advisors are working in this market.

It might be true that there is no room for dabblers in the larger market. And claiming that there is no room for dabblers at all may serve specialist firms well — especially ones that market to generalist advisors. But with the growing importance of retirement in general and 401(k) plans specifically, advisors that dabble using DC plans as a tool to sell other services seem to be thriving.




Desire for Financial Advice Is on the Rise

Jill Cornfield

Sep 09, 2014 --- More Americans want financial advice, especially about retirement: A substantial majority (86%) sought out retirement-related advice, a study finds. ---

The number of Americans interested in financial advice increased, to 35% from 24% in a 2013 survey, TIAA-CREF found in its third annual “Financial Advice Survey.” But even with this 11-point increase, 65% of people still say they are not interested in receiving financial advice—a precarious situation, TIAA-CREF notes, considering the majority of Americans are underprepared for retirement.

Many people who are not interested in advice may simply not understand the benefits, or what advice includes. Only 57% of individuals who are not interested in receiving financial advice are aware that it can include specific recommendations about investing, while 82% of people who are interested in advice are aware of this fact. The findings reveal that people are more and more concerned about retirement: Of those who did receive advice, 86% sought out retirement-related advice, up from 81% last year and 71% in 2012.

As people get older, their interest in retirement-related advice increases, says David Ray, managing director, head of institutional retirement plan sales at TIAA-CREF. “This year’s survey shows that 80% of Gen Yers (ages 18 to 34) who sought advice are interested in retirement-related advice,” Ray tells PLANADVISER, adding that the numbers rise with the age of the respondent: to 90% for those ages 35 to 44, and 92% for survey respondents ages 45 to 54. Interest dips slightly, to 90%, for respondents ages 55 to 64, before a larger drop, to 78% for those age 65 and older.

The survey found two-thirds of Americans who have received financial advice feel optimistic about their finances, and 86% act on financial advice after they receive it. Sixty-two percent of respondents report changing their spending habits after receiving financial advice, and 46% increased the amount they contribute to their retirement.

Other positive behaviors that survey respondents reported after receiving advice include making a plan for paying off loans (53%) and establishing an emergency fund (52%).

Misconceptions As Roadblocks

A range of misconceptions can come between investors and financial advice, the survey found. Distrust is on the rise, with 64% of respondents saying it’s hard to know which sources of advice can be trusted, up 16 percentage points from last year. Respondents also called out several other obstacles to obtaining advice, including:

  • 44% think good financial advice will cost more than they can afford;
  • 39% say the information available does not meet their individual needs;
  • 35% say it’s hard to find the time to look for financial advice; and
  • 32% are not sure what questions to ask.

Many popular misconceptions about financial advice are just that: misconceptions, points out Eric Jones, senior managing director of advisory solutions at TIAA-CREF. “Unfortunately, they can paralyze people’s search for trustworthy advice, leaving many people disengaged with their financial futures,” Jones says. “There are many reliable, affordable sources for high-quality financial advice—including, for many people, their employer.”

About half (52%) the survey respondents say the availability of no-cost financial advice in a benefits package would have an impact on their decision to accept a job offer.

“Those who aren’t interested in advice may not know what it includes or how valuable it can be,” Jones says. “Sound advice begins with the adviser’s deep understanding of your situation and your financial needs and goals. Based on that, the adviser can provide recommendations on how much to save, how to diversify investments, or what financial solutions make sense for your situation. Building a relationship over time with an adviser who knows you and your financial needs can help you navigate changes over the course of your life.”

TIAA-CREF’s third annual Financial Advice Survey was conducted by KRC Research, an independent research firm, and polled a random sample of 1,000 adults nationwide by phone between July 28 and August 7 to assess their attitudes, preferences and behaviors about receiving financial advice.

More information can be found in the executive summary of TIAA-CREF’s study, which can be downloaded here.

Traditional to Roth: How to Help Your Clients Understand In-Plan Conversions

Posted on March 3, 2015 by Paylocity

The option for in-plan conversions from traditional 401(k) accounts to a Roth-style version may seem complicated, but it’s increasingly a smart choice for your customers to offer their employees. “Employees saving for retirement in workplace 401(k) plans are increasingly choosing the Roth option,” Ashlea Ebeling writes for, citing Aon Hewitt’s 2014 Universe Benchmarks report. “When the Roth option is available, 11 percent of participants contribute to a Roth, up from 9.6 percent in 2012.”

The American Taxpayer Relief Act, which became effective in 2013, allows the conversion of vested money in a traditional 401(k) into a Roth-style account. It also allows for converting part of an account, to help with the tax implications, Ebeling writes for a different story. An in-plan conversion can be a powerful move for your clients’ employees, but only those in certain situations will benefit.

Those groups include what Ebeling calls “high-net-worth individuals who don’t need all the money in their 401(k) for retirement expenses but want to grow it as an income-tax-free inheritance for their spouse or kids.” These conversions can also benefit young workers in low tax brackets who have plenty of time for that money to grow tax-free before retirement.

Employees converting their plans likely face high income tax costs, so high-net-worth individual who see extreme losses or gains in various years should pay careful attention to timing their conversions, Andrea Davis writes for Employee Benefits Adviser. Davis also includes a warning: the rules concerning taxation and other aspects of traditional vs. Roth accounts are subject to political agendas and priorities. “You’re making a deal with a partner that has a very poor track record of keeping its promises,” Davis writes, quoting Anton Bayer, CEO of Up Capital Management. ”Ten, 15 years from now, you don’t know who’s going to be in Congress, who’s going to be the president and what the tax law will be.”

So, how can you help your clients decide to offer conversions and educate their employees?

First, let them know about the relatively low cost, writes Robert Lawton for Employee Benefits Adviser. It involves amending plans to add the conversion feature, and then spreading the word among participants. “Depending upon the size of the plan, the total cost of a plan amendment and communication materials falls somewhere between $2,500 and $5,000,” he writes. He also advocates for helping employees understand that converting even a small amount into a Roth-style plan can pay off in the future. These plans must exist at least five years before amounts can be withdrawn tax-free, so starting an account with a minimal investment keeps employees’ options open. “There appears to be no downside associated with adding a Roth in-plan conversion feature. It will not cost anything additional to administer each year and is a nice option to offer employees,” Lawton writes.



Why is 69 1/2 the IRA Owner's most important age?


Wait a minute, says MorningstarAdvisor, who cares about turning age 69½? Everybody knows the big year is when you reach age 70½ not 69½, right? Wrong, again, Retirement Breath. Age 69½ is a big deal, a major year in the life planning calendar. In the year you reach age 69½:

  • If you are still working, it is your final chance to make a traditional IRA regular contribution.
  • And it is your final year to roll your traditional IRA into your workplace plan (if you are still working) totally to avoid taking any required minimum distributions from the IRA.
  • Now is the time to consider other ways to reduce future RMDs too, such as Roth conversions and purchase of a QLAC.

If you are age 70½ or older at the end of a calendar year, you are not allowed to contribute to a traditional IRA for that year. So, the last year you can make a regular contribution to a traditional IRA is the year in which you turn 69½. Making that final contribution does not mean no contributions can be made ever again to your retirement plans. You can make rollover contributions to traditional IRAs (from workplace plans, for example) at any age. And if you are still working, you can continue to contribute to workplace retirement plans (including 401(k)s, pension and profit-sharing plans, Keogh plans, and even SEP IRAs) regardless of age. You can even contribute to a Roth IRA after age 70½ if you have compensation income and your total income is under the income ceiling for Roth contributions. Traditional IRAs are the only tax favored retirement plans that have an age restriction on contributions. How can you reduce future RMDs? Imagine you are approaching age 70½. You will have to start taking required minimum distributions from your traditional IRA very soon. You do not want or need to take that money out, and you do not want to have to pay income tax on it. What are the legal ways to delay, reduce, or eliminate those RMDs? There are three avenues to consider: rolling into a workplace qualified plan, converting to a Roth IRA, and buying a QLAC. The article goes into great detail on the first two approaches.

Broad Strokes of New Fiduciary Rule Outlined by DOL

By John Manganaro This email address is being protected from spambots. You need JavaScript enabled to view it. | April 14, 2015

New rule language outlined by the Department of Labor will increase the number of advisers and brokers required to act as fiduciaries for investment clients.

Language underlying a revised “consumer protection proposal” from the Department of Labor (DOL) has been made public—representing the latest step forward in a years-long effort by the DOL to strengthen investment advice and conflict of interest standards.

Matching the expectations of some industry practitioners and analysts, the DOL appears to be taking an exemptions-based approach to a stronger fiduciary standard. As explained by Labor Secretary Thomas Perez during a national media call, the DOL expects its rule to significantly expand the number of advisers and brokers who will be considered fiduciaries in the context of investment advice. However, Perez was quick to add the wider application of the fiduciary standard would also come along with a new and lengthy list of prohibited transaction exemptions designed to allow new fiduciary advisers to continue to receive commissions, 12b(1) fees and other widely practiced forms of compensation—so long as proper disclosures are made.

Perez was joined on the call by Jeff Zients, director of the National Economic Council and assistant to President Obama for economic policy. Both reiterated Obama’s controversial comments that there is a rampant problem in the U.S. investment advice industry related to conflicted advisers and brokers, who put their own financial interests ahead of the well-being of their clients. While they introduced the call with harsh language about the impacts of bad financial advice on the typical U.S. workplace retirement investor, both Zients and Perez were clearly trying to ease some of the long-standing fears of the advisory industry surrounding potential unintended consequences of a new and stronger fiduciary standard.

For example, Perez highlighted part of the rulemaking language that will establish a new type of contract for advisers/brokers and their clients, which can be used when an adviser wants to recommend a type of product or a type of investment maneuver (such as an individual retirement account rollover) that he feels is in the client’s best interest—but which also could result in additional compensation for the adviser. Perez says an adviser and client could enter this type of a formal contract without requiring prior approval from DOL. Once the contract is signed it gives the adviser the ability to enact transactions that would otherwise be prohibited by ERISA.  

As an example of how this works, Perez described his own dealings with his family’s investment adviser:

“Currently I get advice from a trusted certified financial planner, who under the rule must be a fiduciary,” he explains. “Even as a fiduciary, there are some investments he can offer me that are commission-based or involve some type of revenue sharing or other fees. The new rule makes it clear that he has an obligation to look out for my best interest first, but it doesn’t make it impossible for him to make these recommendations.”

Perez explains that an advisory firm will not have to apply for an exemption directly with the DOL in this case—instead it has to "enter into a proper contract," Perez says, and then the necessary exemptions will automatically apply.

“They first simply have to notify us that they intend to rely on this type of a contract and this exemption, and that they have properly disclosed their own financial interest in said advice relationship,” Perez continues. “Part of this will be to show they have policies and procedures in place that will mitigate the advisers’ own financial conflicts of interest and ensure the client understands the financial interests of the people giving them advice.”

Perez expects this prohibited transaction exemption to be used extensively in the individual retirement account (IRA) portion of the market.

“In the IRA market, the way it will work is, if the broker or adviser doesn’t have any conflicts of interest with respect to a given piece of advice, he or she doesn’t need an exception simply for recommending a rollover,” he says. “But if they are getting a commission or other payments that give him a personal financial interest in the outcome of the advice, this exception will force them to commit to give advice that is prudent and puts the customer first, and has reasonable fees. They can’t mislead the customer and they have to be upfront about their conflict, but when that hurdle is met, the transaction can move ahead.”

The new rule language is outlined in a DOL fact sheet here, and will be published soon in full in the Federal Register. According to the DOL fact sheet, the new rule language is built on “a very simple principle: You want to give financial advice, you’ve got to put your client’s interests first.”

The top line impact of the rulemaking language is that it will expand the types of retirement investment advice covered by fiduciary protections under ERISA. While it distinguishes simple “broker order taking” from broker-provided investment advice, the proposal seems to lump together advisers and brokers under a single fiduciary standard. At the same time it provides a “new, broad, principles-based exemption that can accommodate and adapt to the broad range of evolving business practices.”

Perez explains the impact of the exemptions as follows: “Because of the exemptions and a number of other features, the new rule does not bar or end commissions or other common forms of payment that advisers depend on. It also doesn’t apply to appraisals or valuation of stock within an employee stock ownership plan (ESOP).”

Perez also took time during the call to note that the new rule language “will explicitly allow employers and call centers alike to continue to provide their own general investment education without becoming fiduciaries.” Many advisers have raised concerns about this very point, that forcing call centers to only give fiduciary advice would shut huge numbers of low-balance savers out of access to any advice whatsoever. 

On the timing of a final rule, Perez says the DOL is “very confident we’ll get new insights and commentary from the industry and other stakeholders in the days and months ahead,” so he “can’t say when the final rule is likely to come down.” He wouldn’t even commit to trying to get it done before the end of the Obama Administration, but as one journalist suggested, that seems basically to be a requirement, given the largely partisan nature of the proposal and the uncertainty that it would move forward under even another Democratic president. He also feels its possible the rule will change substantially before it is finally adopted.

The full text of the proposed rule is available here, and the DOL is inviting all stakeholders to submit commentary via its website or the eRulemaking portal on