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.
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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.’”