Many small-business retirement plans are built around IRAs.

The Department of Labor’s plan to revamp the definition of fiduciary under ERISA would impose new compliance costs and legal liabilities related to two of the most popular retirement savings vehicles for small businesses, according to new research by the Chamber of Commerce and ERISA attorney Brad Campbell.

The research notes that the “sweeping change” instituted by DOL’s fiduciary redraft would result in “a lot of unintended consequences,” particularly Employee Pension IRAs (SEP IRAs) and Savings Incentive Match Plan for Employees IRAs (SIMPLE IRAs),  which are popular choices among small businesses because they are “easy and inexpensive to set up and operate.”

The paper, “Locked Out of Retirement: The Threat to Small Business Retirement Savings,” was authored by Campbell, the former head of DOL’s Employee Benefits Security Administration, who is now counsel at Drinker Biddle & Reath, along with the Chamber’s Center for Capital Markets Competitiveness.

More than 9 million households own IRAs as a result of these small employer-provided retirement plans, the research says.

Many small businesses cannot offer 401(k) or similar “traditional” retirement plans because of administrative complexity, costs or eligibility requirements, and instead offer simplified, basic retirement plans built around IRAs — like SEPs and SIMPLEs, the research notes. Campbell noted that these plans are also attractive because plan sponsors do not have to file the ERISA disclosure Form 5500.

The DOL’s proposal “would adopt a broad definition of fiduciary ‘investment advice’ encompassing ‘sales’ communications, certain educational materials, and other situations where no intention to provide individualized fiduciary advice traditionally has been expected,” the research states.

DOL’s proposed regulatory expansion of who’s a fiduciary would “change the rules governing how financial advice is given to $472 billion in small employer-provided retirement plans,” the report states.

Under the DOL’s new plan, “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.”

Consequently, Campbell and Chamber argue, “small businesses may find it even harder to offer retirement plans than they do today.”

Campbell noted on the call that advisors to plans with more than 100 participants would not be impacted by DOL’s new plan, but if a plan has less than 100 participants, “the advisor has to change their business model, how they take commissions, as well as get ‘fiduciary insurance.’”

He added that “it’s not clear yet how significant a problem” purchasing “fiduciary insurance” will be. “Advisors will have to buy an insurance policy that they haven’t even purchased before.”

Campbell explained to ThinkAdvisor that a small plan “hiring an advisor has no choice—the advisor to a small plan must be an ERISA fiduciary under the proposal. If the small plan advisor is not currently an ERISA fiduciary, it would have to rearrange its business model to ensure level compensation or it would have to comply with the requirements of an applicable exemption from the [DOL's] prohibited transaction rules.” Either approach, he continued, ”likely requires significant expense and change. This includes buying fiduciary insurance—advisors who are not currently fiduciaries generally are not covered for fiduciary activity under their standard Errors and Omissions policies.”

By contrast, a large plan hiring an advisor “retains choice,” in that the advisor “to a large plan is not required to make these changes under the [DOL] proposal. By disclosing certain information and upon acknowledgment by the large plan (the details depend on whether the large plan is more than 100 participants or more than $100 million in assets) the large plan advisor does not have to become a fiduciary, avoiding the additional requirements.”

While “DOL perceives this as additional protection for small plans—the Chamber report perceives it as bias against small employers that eliminates choice and increases costs.”

Campbell also noted the problems with DOL’s Best Interest Contract Exemption. While DOL has stated that the best interest contract exemption within its plan “will preserve [advisors’] traditional compensation and therefore minimize problems,” Campbell said, “the reality is [that] advisors … would still have to make very significant changes to their compensation structure” under such an exemption.Changing their compensation structure along with the “tremendous amount of disclosure requirements” under BICE and the fiduciary insurance requirement amount to “quite a significant change,” he said.

Alice Joe, managing director for the Chamber’s Center for Capital Markets Competitiveness, noted on the call that Chamber is hearing from its plan sponsor members that the impact of DOL’s proposal will be felt most “on the financials and how advisors will have to change their business models.”

She said the Chamber is working on its comment letter to DOL and “sorting through” the plan’s prohibited transaction exemptions, including BICE. “We have heard from our members that the exemptions are not workable, [and that] BICE would completely turn their business models on its head.”

That being said, however, “DOL has indicated significant interest in hearing from the industry as they truly want to make this thing work,” Joe continued. Chamber is “optimistic there will be changes to make this rule better.”

Robert Reynolds, CEO of Great-West Financial and Putnam Investments, noted during a speech at the SPARK conference the same day the “potentially damaging impact on costs and investors’ access to advice” from DOL’s fiduciary redraft. “What we need,” he said, “is strong enforcement of existing law — real accountability and consequences — not more red tape. That’s the ideal way to serve savers’ best interests — and drive bad actors out of retirement services.”

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