Beware the invasion of the robo advisers and fiduciaries
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Beware the invasion of the robo advisers and fiduciaries
Shutterstock.com D MA MB MC MD ME MG ZQ ZR ZS ZT ZU With the stock markets notching their worst-ever start for a new year, what should folks saving for retirement and those living in retirement look forward to and plan for in 2016?
We asked several experts for their list of the top concerns and bumps that might be on the horizon, and what retirement savers can do about them. Here’s a look at retirement regulation, the presidential election, robo advisers and Social Security.
(Still reeling from last week? Check out Bob Powell’s column “Don’t just sit there, it’s time to double-check your retirement plan.”)
“Employer-sponsored retirement plans will gain heightened attention due to the election, pending regulation, state initiatives and ongoing concerns about market volatility and participant readiness,” said Tony Verheyen, the executive director at Plan Sponsor Council of America.
Indeed, the Labor Department is certain to publish its final redefinition of fiduciary under the Employee Retirement Income Security Act (ERISA) and all heck will break loose. “We have now arrived at a watershed moment,” said Marcia Wagner of the Wagner Law Group in Boston.
According to Wagner, brokerage firms and advisers may have to change their business model and others may be forced to exist the industry altogether if the rule goes through as currently proposed.
What’s more, she said certain advisers who will be viewed as fiduciaries under the new rule will face tougher compliance and it’s anybody guess what might happen to investors who want to roll their 401(k) into an IRA. “The new rules will make advising on rollovers a fiduciary act, so that capturing rollovers could become decidedly more difficult,” said Wagner.
And Wagner said the new fiduciary rules will cause the loss of some sources of advice on which retirement plan sponsors have relied just as demands on these sponsors to address reforms related to investment and longevity risk are ramping up.
Others share Wagner’s point of view about what’s likely to occur in 2016. “The story this coming year will be the battle for and against fiduciary duty for IRAs,” said David Laibson, a Harvard University professor.
And Jonathan Stein, the founder and CEO of Betterment, said, “All consumers fundamentally deserve unconflicted advice and we are thrilled to see regulators taking a big step to improve retirement outcomes by removing conflicts and increasing transparency.”
Others, meanwhile, say it may take years to learn the full effects of the Labor Department’s new rule. “Retirement protection efforts initiated by the Department of Labor will clearly be the primary focus for the industry in 2016,” said Mark Casady, the chairman and CEO of LPL Financial. “However, the true impact of the Department of Labor rules will play out over years and it will be important to evaluate how any unintended consequences of the rules will be addressed by the industry.”
Casady was quick to note too that “LPL Financial supports an outcome that will provide the highest level of protection for investors while maintaining their access to the critical financial advice that they need and deserve.”
Read our special report, Fiduciary Quagmire and Wagner’s articles on the subject.
More state-sponsored retirement plans
What’s also easy to predict is that more states are likely to join Illinois, California, Oregon, and New Jersey in launching state-sponsored retirement plans. “That could change the entire retirement system,” said Wagner.
In December, by way of background, the Labor Department issued 1) a proposed regulation, and 2) interpretive guidance that addresses how ERISA would apply to various types of state legislation aimed at increasing the availability of workplace retirement programs to private sector employees.
You can follow this trend at State-based retirement plans for the private sector.
It’s automatic and then some
Another clear image in our crystal ball is that more retirement plan sponsors will put things on automatic. “In 2016, companies will continue to increase the policy of automatically enrolling their employees into retirement plans,” said Victor Ricciardi, a professor at Goucher College and co-editor of Investor Behavior: The Psychology of Financial Planning and Investing. “Many people suffer from status quo bias or inertia and do not take advantage of saving for retirement; therefore companies use the option to nudge employees to save for retirement with automatic enrollment. This nudging policy was introduced a few years ago and more companies are using it to ensure greater retirement savings by employees.”
About two-thirds of large 401(k) plans examined by BrightScope and the Investment Company Institute reported using at least two out of the three key plan features analyzed: automatic enrollment, employer contributions, and participant loans, according to a recent PlanSponsor report. Among these large plans — with at least 100 participants and at least $1 million in plan assets — 18% had evidence of all three plan features, PlanSponsor reported.
For his part, Stein suggested that retirees and preretirees will continue to see major low-cost advancements that will improve saving for retirement, both on an individual level and in company sponsored plans.
Read Evidence on Defined Contribution Health and Retirement Benefits: The Road Ahead, published by EBRI.
But what else might happen? We asked experts to gaze into their crystal balls and describe what might happen this year.
Financial education and consumer protection on the rise
It started in 2015 and it’s likely to continue in 2016. That would be efforts by the government and others to help educate and protect investors and consumers. “One constant that always remains in the industry is the importance of continuously educating investors on the need to save for retirement, and the need to do so aggressively,” said Casady. “The financial services industry and the government share the common goal of educating and incenting savings behaviors by consumers to ensure they have the proper retirement plans in place.”
Noteworthy efforts include the following:
More states are considering laws to require advisers to report suspected financial abuse of elderly people, according to a SmartBrief summary of a Wall Street Journal article. Read Officials Seek Clampdown on Elder Fraud
The SEC is taking a hard look at issues relating to retirement in its current round of examination of financial advisers. The SEC recently distributed a 75-query document to advisers requesting information about their practices regarding 401(k) rollovers, compliance controls, fees and other issues, according to a summary of an InvestmentNews story by SmartBrief.
The Financial Industry Regulatory Authority (FINRA) in 2016 will prioritize conflict-of-interest concerns, protection of senior citizens, according to a SmartBrief summary of a Wall Street Journal article. Read Finra’s 2016 Focus Includes Brokerage ‘Culture’ and Protecting Seniors. Of note, since FINRA’s helpline for seniors launched in April, it has helped recover almost $750,000. Read Senior Hotline Sees Early Success.
More lawsuits to come
Another expert, meanwhile, expects to see an increase in lawsuits. We already Tibble and Boening in 2015. In Tibble v. Edison International, the U.S. Supreme Court decided that that under the Employment Retirement Income Securities Act (ERISA), a plaintiff may timely commence a claim for breach of fiduciary duty within six years of the breach of a continuing duty of prudence in selecting investments.
And in the case of Spano et al. v. Boeing et al, the world’s largest aerospace company, agreed in November to pay $57 million to settle a long-running class action lawsuit that alleges the company’s 401(k) plan charged its employees “excessive” fees.
“I expect litigation to continue to increase,” said John Olsen, president of Olsen Annuity Education and author of John Olsen’s Guide to Annuities for the Consumer. “The Ernest Abbit v. ING USA Annuity and Life Insur, et al class-action suit took me completely by surprise. This is a doozy and it bodes ill for every insurance company, every agent, and, ultimately, every insurance consumer.”
Read ING Customers Win Partial Class Cert. In Fraud Suit.
Other things to watch out for
Robo advisers emerged in 2015 and we can expect more of the same in 2016. “I would expect to start seeing some more innovation and acquisitions, including some of the startups out there, as the industry seeks new revenue and margin opportunities,” said Matt Fellowes, the chief innovation officer at Morningstar.
According to Wagner, proposals to cut back the tax incentives offered to sponsors of tax-qualified plans are in the offing.
New retirement products are headed your way, but maybe not till 2017. “I also think the wave of innovative startups that have been sweeping across banks in recent years will begin to wash-up more on the shore of the retirement market,” said Fellowes. “This will bring consumer benefits in-time, including product innovation, lower fees, better advice, and more value; but, I don’t see any of this materially impacting consumers yet in 2016.
Later this week, Bob provides the outlook for and practical advice related to health issues, Social Security regulation and market volatility.
Source Moneywatch
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