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Change to DOL definition of ‘fiduciary’ could impact millions, says U.S. Chamber report

By R. Jason Howard, J.D.

According to a U.S. Chamber of Commerce report, the Department of Labor’s proposed rule to change the definition of fiduciary could impact nine million U.S. households that depend on small employer-provided retirement plans such as Simplified Employee Pension IRAs (SEP IRAs) and Savings Incentive Match Plan for Employees IRAs (SIMPLE IRAs).

Small business retirement savings. The report, “Locked Out of Retirement: The Threat to Small Business Retirement Savings,” authored by Brad Campbell, counsel for Drinker Biddle & Reath, notes that small businesses make up 99 percent of all U.S. employers, and account for 63 percent of new private-sector jobs, as well as almost half of all private-sector employment and output. For those small businesses, the most attractive and popular retirement savings solutions are the SEP IRAs and SIMPLE IRAs.

Small businesses rely on those plans because they are easy and inexpensive to set up and do not impose ongoing administrative or reporting requirements on employers. Nearly 10 percent of all current IRAs come from those plans with approximately $472 billion of retirement savings being invested as of the end of 2014.

Proposed change. The report focuses on the expansion of the definition of fiduciary investment advice under the Employee Retirement Income Security Act (ERISA) and the impact the expanded definition would have on small businesses and their employees.

The proposal, if adopted, would broaden the definition of fiduciary “investment advice” to encompass “sales” communications, certain educational materials, and other situations where there is no intention to provide individualized fiduciary advice. The result would be to put the DOL in charge of financial advice provided to all Individual Retirement Accounts (IRAs) as well as to all private-sector, employer-provided retirement plans; roughly $15 trillion in retirement savings.

Seller’s carve out. The report explains that large plan advisors with 100 or more participants or $100 million or more in plan assets are ‘carved out’ of the DOL proposal and thus, a large plan does not have to be a fiduciary. The absence of a ‘carve out’ for the advisor to a small business plan means that marketing retirement savings vehicles is considered to be providing investment advice and the advisor must now determine how to comply with the rule. So, the advisors choice under that circumstance is to “provide advice for a level fee or, if the advisor has variable compensation, he or she must comply with the many conditions of an applicable prohibited transaction exemption (an exemption that may still limit fee variation).”

End result. Small business plans will have to absorb costs that large plans do not and what the DOL sees as extra protection for small business plans will result in an increase in the costs of providing services to small businesses, according to the report.

Reaction from the chamber. The U.S. Chamber of Commerce press release quoted David Hirschmann, president and CEO of the Chamber’s Center for Capital Markets Competitiveness as saying “Nine million small business supported households will either completely lose access to employer-sponsored retirement plans or face dramatically higher fees under the overly-broad and unworkable Department of Labor plan.” He continued, stating that “The irony is that the DOL’s proposed regulations risk hurting the very small businesses and workers they are intended to protect.”

Randy Johnson, senior vice president for Labor, Immigration and Employee Benefits at the Chamber, also expressed his concern saying “Small businesses want to provide retirement benefits to their workers and currently do so through SEP and SIMPLE IRA plans, which would be directly impacted by the DOL proposal. Small business owners choose plans based on the individual retirement account system rather than 401(k) or similar ‘traditional’ retirement plans due to cost, administrative complexity, or eligibility rules,” but “Unfortunately, this proposed rule is going to make it more difficult and costly for small businesses to offer any retirement plan.”

Comment period. The public comment period for this proposal is open until July 20, 2015. After the comment period, there will also be public hearings at the DOL. After all of the comments and hearings are concluded, the DOL will have to review the comments and take them into account in writing a final rule.