DOL Fiduciary Rule Has Implications for Outsourcing Liability

The Department of Labor’s proposed fiduciary rule would make a fiduciary out of any advisor giving 401(k) investment advice.

But many advisors are likely to outsource that risk, explains InvestmentNews:

Outsourced investment advisory services for 401(k) plans stand to reap the benefits of the Labor Department’s proposed rule to raise investment advice standards in retirement accounts.

Here’s how the outsourced services generally work: The providers contract with record-keeping firms, which then offer the services to all defined contribution plans on their platform. Under the 3(21) service, outsourced providers screen the funds available over a record keeper’s platform, and narrow those down to a handful of funds in certain asset categories that advisers and plan sponsors can then use to build a final 401(k) lineup. In the 3(38) offering, the providers — not the plan adviser or employer — choose the ultimate combination of funds.

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Industry watchers expect even more uptake if the DOL rule becomes final, in part because these outsourced services tend to be used mostly in the small and micro 401(k) market.

“There’s definitely going to be heightened liability in serving [401(k)] plans, especially smaller plans,” said Scott Cooley, Morningstar’s director of policy research. (Of course, he added, this depends on the text of the final rule, which is likely to come out this month or early April.)

Click here for a fact sheet on the proposed rule.

Photo by thinkpanama via Flickr CC License