In Patricia Owen’s mind, she’s more than the boss to her employees. She considers herself “a second mother” to her 25 staff members, most of whom are millennials. It’s little surprise, then, that for more than a decade Owen offered every employee a 401(k) retirement savings plan in which her small company matched half of their monthly contributions.
Unfortunately, with the economic collapse in 2008, her spa’s sales slumped, and Owen was forced to suspend the 50 percent match program in order to avoid cutting back on her payroll.
Her company preserved, and seven years later, with sales picking up again and her business expanding, she recently started looking at reinstituting the matching contribution.
“Since the impact of the financial crisis has subsided, my company is now on stable footing and growing again, and I want to be able to attract new employees through competitive benefit packages,” said Owen, owner of FACES Day Spa on Hilton Head Island, South Carolina.
Instead, due to a misguided new regulation coming down the pipe from Washington, she may be forced to offer even less retirement help to her employees.
“The potential of significantly higher costs for small businesses emanating from the impending fiduciary rule at the Department of Labor has caused me to hold off on re-instituting the match for now,” Owen told members of Congress during a hearing Wednesday before member of the House Ways and Means Committee. In fact, “if the rule moves forward as proposed,” Owen later added, “it is possible that I may even need to drop the plan altogether.”
The Labor Department’s fiduciary rule - or more simply, retirement rule - that has Owen (pictured below) and many other small business owners thinking twice about the retirement benefits they can offer their employees was formally proposed earlier this year. In short, the rule would restrict the advice that financial experts can share with small business owners and employees, while also severely limiting the retirement plan options presented to those small companies.
Why would small businesses like Owen’s feel a disproportionately large share of the pain? In large part, that’s because an advisor marketing to a large retirement plan (one with at least 100 plan participants) is not considered a so-called fiduciary under the proposal, but one marketing to a small plan is considered a fiduciary. Under the rules, fiduciaries working with small firms like Owen’s can expect to incur new regulatory compliance costs. When passed along, those costs could make retirement advice services cost prohibitive to small businesses.
“It is unlikely that I will be able to absorb both the higher costs resulting from the Department of Labor rule and provide a 50% match to my employees,” Owen told lawmakers at the hearing, which was held by the House Ways and Means subcommittee on oversight.
In addition, the proposed rule includes counterintuitive new restrictions on investment education. Under current regulations, for example, a financial advisor can help a client select specific investments within a plan in which to invest funds. Under the new proposal, an advisor can only provide a so-called model asset allocation to an investor based on age, retirement goals, and risk tolerance, leaving investors to conduct their own additional research.
That, too, will leave Owen and her employees in a bind.
“My employees value the investment education provided to them – specifically, providing investment recommendations in various asset classes,” Owen said, noting that currently her employees can call an 800 number any time to get personalized investment advice. “Many of my employees cannot afford to pay for investment education separately and might be discouraged from investing in the plan at all if the company did not provide this benefit.”
Consequently, “by disallowing any party to make the link between asset classes and specific investment options,” Owen continued, “the Department of Labor is forcing plan participants into the tenuous position of figuring out how to invest their own retirement savings at the risk of making poor choices.”
Owen is hardly alone, and she isn’t the only small business owner speaking up in Washington. Darlene Miller, president of Permac Industries in Burnsville, Minn., this summer told members of the Senate Committee on Health, Education, Labor and Pensions that DOL’s retirement rule will undoubtedly "make it harder for small business employers and employees to access financial advice and to increase retirement savings.”
Bradford P. Campbell, former U.S. Assistant Secretary of Labor for Employee Benefits, issued similar warnings on Wednesday before the Ways and Means subcommittee.
“I’m particularly concerned about the effect the proposal likely would have on reducing choice, restricting access, and increasing costs facing small retirement plans and individuals with small account balances, Campbell testified. “These groups are most in need of access to professional investment advice, but are least likely to be served due to the increased compliance costs and increased legal liability risks unnecessarily created by the proposal.”
What small businesses need now, he said, is for federal regulators to go back to the drawing board and craft rules that work better for the businesses and promote more retirement savings education, not less. Owen, speaking on behalf of small businesses, wholeheartedly agreed.
“It is extremely important to consider the negative impact that increased costs will have – particularly in the small business plan market,” she told the lawmakers in the room. If the rule take effect as proposed, she said, “the unintended consequences will have substantial negative repercussions on my employees, as well as the employees of many other small businesses.”