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Small businesses can breathe a sigh of relief. The fiduciary rule, a proposed regulation from the Labor Department under President Barack Obama that would limit access to retirement investment advice for small businesses and their workers, has been delayed:
The U.S. Labor Department will delay implementation of its "fiduciary" rule by 60 days while it undertakes a review on whether the rule may hinder Americans' ability to get access to retirement investment advice, according to a filing in the Federal Register.
The department's rule, which requires brokers offering retirement investment advice to act in the best interest of their customers, has been heavily criticized by Republicans and Wall Street amid concerns it may make investment advice too costly.
The delay of the rule, which was slated to take effect April 10, was prompted after President Donald Trump in February ordered the department to conduct the review on whether it should be revised or repealed.
Neil Bradley, senior vice president and chief policy officer for the U.S. Chamber, applauded the decision:
The delay reflects one simple reality–that this rule was unworkable and is already starting to boomerang on retirement savers who are facing fewer choices and less advice. If done the right way, investors can be protected with a best interest standard that also expands rather than restricts the retirement options of millions of Americans.
Under the proposed rule, small business employees would have less access to retirement advice, as Aliya Wong, U.S. Chamber executive director for Retirement Policy, explained in 2016:
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.
At the same time, the costs for small businesses to offer retirement plans to employees could go up:
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.
Getting Americans to save more for retirement is an important public policy goal—especially given the state of our entitlement programs. That’s why taking the time to review the proposal and understand its real-world effects (perhaps even rescind it) is a smart move by the Labor Department.