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The purpose of the DOL’s proposed rule to reform fiduciary standards is to protect American workers’ financial security and investment decisions. It’s a laudable goal, but the proposed rule discriminates against small businesses by subjecting them to additional regulations that will reduce their employees’ access to retirement savings options.
Metaphorically speaking, if the proposed rule is passed into law without significant changes, the DOL will be guilty of throwing a significant number of small business retirement plans out with the bathwater.
Go Ahead and Throw Out the Dirty Bathwater.
Today, we have a greater need than ever before for responsible retirement planning because people are living longer and may need assets to last for several decades in retirement. DOL, therefore, has reason to toss out the old bathwater and update old fiduciary standards in order to help protect investors’ financial interests and prevent unwise investment decisions. However, regulations intended to protect people should not diminish their access or freedom to choose from a variety of retirement saving options.
But Don’t Throw Small Business Retirement Plans Out Too!
If the final rule is not significantly changed, it will leave small businesses disadvantaged. This will ultimately hurt the primary group of people the Labor Department is charged with supporting: American workers.
Here are 3 ways in which the proposal specifically harms small businesses:
1. It Discriminates Against Small Businesses and Will Decrease Access to Advice.
Under the proposal, there is a carve-out for advisors that are selling or marketing materials (“Seller’s Carve-Out”). However, this carve-out does not apply to advisors to small businesses. Therefore, all advisors to small businesses are subject to the stricter requirements of the proposed rule.
The assumption that small plans, participants, and IRA owners cannot understand the difference between sales and advice runs counter to real world experience. The Labor Department can protect participants, IRA owners, and small plans with the same kind of disclosures that it requires of large plans under the large plan carve out, but without eliminating a saver’s right to choose the services and products that best fit their needs.
2. Access to Investment Education Will Be Limited to Small business Owners and their Employees.
Many small businesses rely on trusted third parties to provide investment education to their employees. One example is providing asset allocation models that provide a recommendation on investments in various asset classes based on a plan participant’s age, expected retirement and risk tolerance.
However, under the proposed rule, any party who provides specific investment options for each asset class would be considered an ERISA fiduciary. This significant modification from current rules, which allows for such information on a non-fiduciary basis, would harm investors, particularly small business plan participants that likely have access to fewer resources.
By not allowing any one to make the link between asset classes and specific investment options, the Labor Department will force plan participants into the tenuous position of figuring out how to invest their own retirement savings at the risk of making poor choices.
3. Small Businesses Could See Higher Costs for Services or Worse Have Fewer Options Available.
Because advisors to small businesses are not carved out of the fiduciary definition, they must change their fee arrangements or qualify for a special rule called an “exemption” in order to provide services on the same terms as before. However, the exemptions generally won’t help financial advisors who are working with small businesses to set up plans because it may be illegal for those advisors to get commissions or to recommend certain investments.
The rule intends to phase out commission compensation, which is a payment method that primarily only small business owners use. Small businesses often don’t have a large enough budget or number of employees to justify paying a flat fee for financial advisor services. This problem is highlighted in services for Simplified Employee Pension (SEP) plans and Savings Incentive Match Plan for Employees of Small Employers (SIMPLE) IRAs.
One way advisors might try to comply is by charging a flat fee for their SEP or SIMPLE IRA services which will cost more than the current commission-based structure. Consequently, it is extremely important to consider the negative impact that increased costs will have on small businesses.
Being Small Doesn’t Make You a Baby.
The most frustrating part about DOL’s proposed retirement rule is the the agency is treating small businesses like they’re babies. The proposed rule singles out small businesses from their competitors and “protects” them by enforcing stricter regulations. Apparently, there’s a stereotype that small business owners are naïve and more at risk of being swindled by financial advisors, while larger businesses are assumed to be immune from swindling.
The proposed retirement rule categorizes businesses with 101 employees as “big kids” by permitting them to make agreements with financial advisors that ensure honest and transparent investment sales.
Companies with 99 employees, on the other hand, are treated like “babies” who aren’t as savvy as the big kids and can’t be trusted to make their own decisions about working with financial advisors.
The reality is no one is a baby here. Regulatory decisions should not be made based on assumptions that some business owners are less sophisticated than others simply because of how many people they employ. Many small business owners choose to maintain their small operating size rather than expand, but they are still extremely canny and successful.
Businesses should not be deprived of offering retirement saving options to their employees simply because they don’t have enough people on payroll to convince the DOL of their competence.