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Regulation and Compliance > Federal Regulation > DOL

The DOL fiduciary rule is bad news for small business

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Much of the industry reporting on the Department of Labor’s fiduciary rule has explored the players it will most directly impact, advisors and their clients.

Less focus has been given to a key constituency underpinning the nation’s economy: small businesses.

Encompassing manufacturing operations with fewer than 500 employees and non-manufacturing firms with $7.5 million or less in annual revenue, small businesses — from carpenters and electricians to owners of restaurants and web design firms — have a lot riding on the DOL rule.

That’s because their ability to recruit, reward and retain talented workers needed to remain competitive depends in no small measure on their employee benefits packages. To the extent these benefits lend them an edge, they’re better positioned to compete in the labor market.

Related: NAFA plots course in DOL rule fight

The fear among small business owners, however, is that the DOL fiduciary rule will do just the opposite: by raising the cost of retirement investment advice; and by making access to advisors prepared to comply with the new rule more difficult.

So it should come as no surprise that four business associations joined with 5 financial services organizations on June 1 in seeking to block implementation of the rule in a 9-party lawsuit filed in the U.S. District Court for the Northern District of Texas. Among the former were Texas-based Chamber of Commerce associations representing businesses in Greater Irving-Las Colinas,  Humble Area, Lake Houston Area, Lubbock, in addition to the U.S. Chamber of Commerce.

The 9 parties aim to secure a preliminary injunction and summary judgment vacating and setting aside the DOL rule and prohibited transaction exemptions. In their 8-count complaint, the plaintiffs argue that the DOL exceeded its authority in promulgating the rule and PTEs, creating “unwarranted burdens and liabilities” for advisors and insurers and undercutting the “interests of retirement savers.”

Related: 3 exciting unintended consequences of the DOL rule

The litany of grievances detailed in the 8-count complaint is wide-ranging. Among other alleged violations, the document charges that the DOL:

  • Exceeded its authority under ERISA by extending the fiduciary rule’s application to individual retirement accounts and fixed indexed annuities;

  • Created an overly broad definition of “fiduciary” that doesn’t align with the law of trusts, the Investment Advisor’s Act of 1940 and ERISA;

  • Authorized a private right of action under which retirement account investors can sue financial institutions and their advisors for alleged breaches of the rule; and

  • Assessed “arbitrarily and capriciously” the fiduciary rule’s benefits, consequences and costs.

The last is particularly consequential for small businesses, most notably those that employ 100 or fewer employees, which account for 96 percent of U.S. Chamber of Commerce’s 300,000 members. The complaint charges the fiduciary rule will result in “significant compliance and other costs” for these companies.

By the DOL’s own estimate, the cost of compliance over a 10-year period will be $31.5 billion, nearly as much as the purported $33 to $36 billion in 10-year benefits that would accrue to retirement investors (in the form of better-performing investments) under a best interest standard. That marginal benefit is erased, however, when you add $13 billion in additional costs that Morningstar forecasts retail investors will pay in advisory fees under the rule — fees that will have to be factored in the added cost of compliance.

Related: Consumer groups reject DOL lawsuits

“Rather than making it easier and more affordable for small businesses to find ways to create 401(k), SEP and SIMPLE IRA retirement plans for small businesses, the DOL rule takes a step in the wrong direction — making it harder,” said David Hirschmann, President and CEO of the U.S. Chamber of Commerce’s Center for Capital Markets, speaking during a June 2 conference call representing 5 of the 9 parties to the complaint. “By significantly raising the costs that advisors will have to pass along, fewer small businesses will create retirement savings plans.”

Unable to offer such plans, small businesses will suffer in the market for talent, notably to larger companies still be able to afford retirement benefits. At a time when the struggling U.S. economy needs small businesses more than ever to help drive growth, imposing higher costs on them would be very counterproductive.


DOL 101: The fiduciary rule’s impact on insurance-only agents 

DOL 101: The fiduciary rule’s impact on IMOs

DOL fiduciary rule: Disruption or opportunity?

U.S. Chamber: DOL overstepped its authority with fiduciary rule



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