The New Fiduciary Rule: Good or Bad for Small Plan Sponsors?

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With more small businesses saying they plan to increase retirement plan contributions or start offering retirement benefits, attention is turning to the impact of the Department of Labor’s new fiduciary rule on those aspirations.

Under the final rule, which takes effect in April 2017, persons who provide investment advice or recommendations for a fee or other compensation with respect to plan or individual retirement account assets are considered plan fiduciaries, and, as such, must act in the best interest of their clients and disclose any potential conflicts of interest.

“The rule applies to any business with a retirement plan,” benefits attorney Greta E. Cowart, shareholder with Winstead PC in Dallas, told Bloomberg BNA. “The difference in size will primarily determine the fees they pay and the options they can get in the market,” she said.

Chamber Criticism

Following the rule’s issuance on April 6, the U.S. Chamber of Commerce renewed its criticism that the rule is bad for small businesses.

In an issue brief published on April 20, the chamber said that while the final rule made some of the fixes suggested by commenters, many critical fixes remained unaddressed or were made worse by the rule, including “whether the final rule discriminates against small businesses.”

In June 2015, when DOL was still considering the rule, the chamber complained in a written comment letter to the agency that the rule as proposed would increase the cost and complexity associated with two plan designs popular among many small businesses—the simplified employee pension (SEP) and savings incentive match plan for employees (SIMPLE) IRAs—in lieu of traditional retirement plans.  In addition, the chamber argued, the rule “is also likely to result in many financial advisors ceasing to offer or service such plans.”

Many advisers would find it too risky and expensive to change business models and fee structures for small business plans to accommodate the DOL’s proposed fiduciary rule, the chamber asserted.

According to a Small Business Retirement Study submitted along with the comment letter, “even providing a small business with marketing materials containing sample investment lineups for SEP IRAs or SIMPLE IRAs could constitute investment advice, as could providing an individual account holder with certain educational materials that reference the specific investment funds that are available to him or her.”

Rule’s Impact

The costs for additional requirements for vendors such as brokerage firms, platform providers, investment advisers and tax advisers to continue to provide services to retirement plans is something that all plan sponsors, including small businesses, will have to wrestle with, Cowart said.

For example, a broker or other service provider will need to retain proof of its compliance with the Best Interest Contract Exemption, as well as a number of other exemptions, for transactions it engaged in for six years and to make those records available upon request to the group of persons specified in the exemption. “Such additional record maintenance will mean additional costs and this could impact the retirement plan products available to smaller employers,” she said.

Vendors will have to maintain and provide records proving compliance with the prohibited transaction exemptions, Cowart added. As part of this responsibility, plan sponsors will need to be ready to answer inquiries from the participants or employee representatives, including employee organizations, regarding the fees related to such transactions and the decisions on the recommendations made to cause such transactions to occur, she said.

“While these record requests will go to the plan vendors and the plan vendors will need to respond to them, the plan fiduciary may ultimately need to face additional questions regarding their decisions on the recommendations that lead to the transactions made using the plan assets,” she said.

In addition, plan sponsors with smaller plans may face fee increases related to other services provided, Cowart said. “Since advisors to individuals terminating employment or retiring will need to establish why their recommendation for a rollover or to their particular IRA is in the interest of the individual, plan sponsors should expect requests for additional copies of plan documents and summary plan descriptions as well as information on all fees and expenses charged to participant accounts at the time of separation. This information is necessary to enable the broker advising the retiree as to whether rolling over the assets to another plan is in the best interest of the retiree compared to the other options available.”

Survey of Small Business Owners

An online survey of 500 small business owners conducted by Harris Poll on behalf of Nationwide found heightened interest among those owners in helping their employees prepare for retirement.

According to survey results released in February, nearly two-thirds of respondents, 63 percent, said it was important to offer retirement benefits, while only a third of all owners, 34 percent, actually did so.

Among small business owners who offer retirement benefits to their employees, including 401(k) plans, 67 percent said they intend to increase their company contributions. In addition, 30 percent of small owners that currently didn’t offer retirement benefits said they planned to do so in the future.

If these small business owners follow through on their stated intentions, that would mean that over half of them, or 54 percent, would be offering retirement benefits to their employees.

The survey defined small business owners as companies with fewer than 300 employees.

The survey was conducted in June 2015.

See related stories, Small Employers Plan Retirement Benefits Boost, and Questions for Some Advisers: Adapt or Flee?

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