Small businesses will pay a big price if the Department of Labors proposed changes to the fiduciary rules go into effect, says the U.S. Chamber of Commerce.
The DOLs fiduciary regulations would impose significant new compliance costs and legal liabilities on advisors to SEP and SIMPLE IRAs, costs that will be passed on to these small business plans and employees, according to the U.S. Chamber of Commerces report, Locked Out of Retirement: The Threat to Small Business Retirement Savings.
Unfortunately, the DOL rules create hurdles which result in higher costs to the plan, says Alice Joe, managing director of the Center for Capital Markets Competitiveness at the U.S. Chamber of Commerce.
In April, the DOL proposed regulations that would hold brokers and advisers to IRAs to the same fiduciary standard as registered investment advisers under the Employee Retirement Income Security Act.
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The result would be that many traditional forms of compensation, such as commissions that vary from one investment to another, for financial advisers could become illegal under special provisions in that law called prohibited transactions, the report says.
Ninety-nine percent of U.S. employers are small businesses that produce 63% of new private-sector jobs, Joe says.
The employers who choose to offer SEPs and SIMPLE IRAs do so because of the administrative complexity, costs or eligibility requirements of traditional 401(k) plans. SEPs and SIMPLE IRAs are simple and inexpensive to set up and operate.
These types of plans provide roughly $472 billion in retirement savings for over 9 million U.S. households.
Because of the administrative hurdles included in the new regulations, many advisers may not be able to serve the smaller retirement plan market, cautions the U.S. Chamber of Commerce.
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Its not that anyone here wants bad advice. Everyone wants the best advice for small businesses and workers but that change has unintended consequences, says Brad Campbell, counsel with Drinker Biddle & Reath LLP and author of the Chamber report. The DOL is biting off more than it thought it was chewing. One of the unintended consequences is how it is going to impact small businesses and small plans.
Large plan advisers are excluded from the new rules. If a retirement plans has more than 100 participants or $100 million in assets, advisers can do what theyve always done. If plans have fewer than 100 participants, their advisers must change the way they receive compensation and will be forced to purchase ERISA fiduciary insurance, which is not something theyve had to purchase in the past, Campbell says.
If advisers and vendors change to a flat fee model, they may actually charge more than before to account for the risk and expense associated with changing their method of doing business. This potential loss of low-cost investment assistance was one of the reasons why the DOLs previous proposal to redefine fiduciary investment advice several years ago a proposal that was ultimately withdrawn raised objections from many within Congress, the report says.
The public comment period on the rule is open until July 20, 2015. After that the DOL will hold public hearings. A final rule could happen sometime in 2016.
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To be most effective, the DOL proposal needs to strike a proper balance between protecting the interests of retirement investors and ensuring they have access to reasonably priced investment services, according to the report. To accomplish this, advisers and financial institutions need to be provided with practical and clearly defined boundaries as to what is or is not fiduciary investment advice, as well as with commercially realistic and reliable standards.
Paula Aven Gladych is a freelance writer in Denver.
