More About the Fiduciary Gap

Thanks to the many people who shared their insights about various state retirement arrangements for eligible private company employees and the need for a proverbial umbrella to address the fiduciary gap.

Let me start with the Nutmeg State program since I discussed it in two earlier posts. Interested parties can click to download the final legislation that sets up the Connecticut Retirement Security Exchange. (Note the new name.) Several changes caught my eye.

  • On page 156 of 298, there is a provision that "If a participant does not affirmatively select a specific vendor or investment option within the program, such participant's contribution shall be invested in an age-appropriate target date fund that most closely matches the participant's normal retirement age, rotationally assigned by the program." If "rotationally" means "random," it will be helpful to know how board members identify age cohorts and select (and monitor thereafter) a particular product for each group.
  • Regarding a provision that allows the sitting governor to individually select the board chair without the advice and consent of the General Assembly, a best practice is that the engagement process be transparent. Interested parties want to know that the appointment reflects the right person for the job
  • It would be helpful to know the basis for why the voluntary opt-in for small businesses with more than five employees was removed. After all, forced regulation could end up costing firms so much in terms of paperwork and payroll set-up that hiring plans are put on hold.
  • It would be helpful to know how the three percent default contribution level will be tracked so that legislators will know whether to seek an increase later on. It's a low number, especially given the math for what can be done privately. Suppose a person makes $50,000 per year in wages. The three percent deduction translates into $1,500. In 2016, the IRA contribution limit for someone younger than fifty years is $5,500. Should an individual decide to allocate the maximum, participation in the state program will logically require that the individual go elsewhere to invest the additional $4,000. Why doesn't that individual simply invest the full $5,500 with one reputable organization? I assume the counter argument is that an individual who would not max the annual IRA limit needs a nudge in the form of the state program.

As I wrote in "State Retirement Arrangements for Small Business Employees," there are multiple state endeavors and one would need to examine the details of each one to assess economic impact and pension governance implications. Questions about federal programs exist as well. Putting aside dire long-term projections about the U.S. Social Security Trust Fund, absent reforms, several critics are unhappy with what they see as a fiduciary gap for anyone enrolled in the myRA program. By way of background, there are no fees to the individual enrollee. This is good but the guaranteed return is low because it is tied to federal debt security yields. For June 2016, the number is 1.875 percent APR. There is a lifetime maximum of $15,000 for eligible persons. A person's employer must agree to facilitate automatic deductions which means you must be employed.

One attorney I called today said he did not think there is a fiduciary in place for this federal product. Chris Carosa, editor of Fiduciary News, has another take. In "Does "myRA breach fiduciary duty?" he lays out reasons why he thinks the myRA product is "blatantly ill-suited for retirement savers." He decries the "oozing irony" of political leaders who want the Fiduciary Rule applied to others but not to themselves, adding there is no diversification potential and the selling firm (i.e. the U.S. Treasury) is conflicted by distributing its own product. Another retirement industry professional wants to know "What fiduciary would MANDATE that a twenty-five year old invest his or her retirement assets in a short to intermediate term government bond fund and expect to avoid liability?

You get the picture. We need to understand where the fiduciary gaps exist and then strive to close them as quickly and efficaciously as possible.

State Retirement Arrangements for Small Business Employees

After posting "Public-Private Retirement Plans and Possible Fiduciary Gaps," a senior legal expert kindly informed me that Connecticut's legislation draws extensively from U.S. federal pension law. (ERISA does not directly apply to most government plans and the U.S. Department of Labor has proposed a safe harbor that would exempt states from being tagged as ERISA fiduciaries.) Interestingly, a word search for "fiduciary" in the Public Act No. 16-29 document comes up empty. Specifically, as laid out in Section 6, entitled "Board Duty To Act With Prudence And In Interest of Participants," the Connecticut Retirement Security Authority board of directors are to act with the "care, skill, prudence and diligence under the circumstances then prevailing that a prudent person acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of like character and with like aims" and solely "in the interests of the program's participants and beneficiaries."

Regarding legal redress, my understanding is that individuals who allow their employers to deduct three percent of their taxable wages to be placed in an "age-appropriate target date fund" or similarly allowed investment will not have the right to sue individual members of the Connecticut Retirement Security Authority Board nor will they have the right to sue the State of Connecticut. They will have to rely on authorized directors and the Attorney General to properly oversee selected service providers and take corrective action to improve things going forward. However, even if participants can demonstrate economic harm, they would not be able to recover past damages.

Programs offered by other states vary. One would have to research dozens of legal documents to compare and contrast governance, investment opportunities and conflict of interest avoidance mechanisms. Interested parties can visit the Pension Rights Center's State-based retirement plans for the private sector or the AARP's State Retirement Savings Resource Center. I am not sure how often these websites are updated.

I remain skeptical and am not alone. Michael Barry, president of the Plan Advisory Services Group, explains his reservations in "Are State Plans the Answer?" (Plan Sponsor, November 2015). Paul Schott Stevens, president and CEO of the Investment Company Institute, gives a thumbs up to private initiatives such as expanding multiple employer plans or MEPs to include smaller companies. Another way forward would be to simplify 401(k) plan regulations to encourage employers to better help their workforce save for retirement. See "State-Run Retirement? Better to Go Private" (Wall Street Journal, February 7, 2016).

My lack of enthusiasm for these state-run programs has more to do with philosophy and a desire to encourage economic growth. Here is some food for thought.

  • Small businesses around the world are drowning in a sea of regulations. According to an article in Small Business Trends, there is an inverse relationship between company formations and the number of pages in the Federal Register. These "little engines that could" create jobs are not leaving the train station, discouraged by too many rules.
  • As any free market economist can handily demonstrate, unintended consequences often occur, resulting in added expense and unwelcome behavior. Instead of spending X hours per month on growing sales and profit, a small business owner that is obliged to complete paperwork may now forego hiring new employees or cut back on existing perks.
  • Some of the states that are setting up retirement programs for private company workers have a poor track record as evidenced by underfunded pension plans for municipal staff.
  • Unless one is convinced that small company employees are unable or unlikely to set up an IRA on their own, these state-involved arrangements are not needed. CNBC reports that "Employees participating in auto enrollment tend to contribute less than people who sign up for 401(k) plans on their own, often because their employers set a low default contribution level."
  • It's not clear to me that individuals will have a better level of consumer protection by being part of a state-run program versus setting up an IRA account directly with a reputable financial institution. So far, no one has convinced me to the contrary.

I'm all for encouraging individuals to save for the long-term but I seriously wonder why government has to be involved with every decision someone makes. Hopefully I will be proven wrong and these state programs for private company employees will succeed.

Note: I welcome insightful essays and commentaries on this and other relevant pension governance topics. If you would like to be a guest contributor, please email contact@fiduciaryleadership.com with your idea or write-up.

Susan Mangiero, PhD Joins Financial Women's Association Panel About Fiduciary Rule

Dr. Susan Mangiero will join a panel of esteemed experts to talk about the U.S. Department of Labor's Fiduciary Rule on June 21, 2016. Sponsored by the Financial Women's Association, New Jersey chapter, CPE credit is available (CLE credit is pending). Meeting at the Seton Hall School of Law in Newark, this timely event features the following speakers:

  • Gregory F. Jacob, Esquire - Moderator - Former Solicitor of the U.S. Department of Labor, Partner in the Washington, DC office of O'Melveny & Myers and a member of the Financial Services and Labor and Employment Practices;
  • Susan Mangiero, PhD and Accredited Investment Fiduciary Analyst - Panelist - Forensic economist, investment risk governance expert and author/researcher with a focus on ERISA and non-ERISA fiduciary best practices;
  • Kathleen M. McBride, AIFA - Panelist - Founder of The Committee for the Fiduciary Standard and The Institute for the Fiduciary Standard, a nonprofit, nonpartisan think tank dedicated to providing research, education and advocacy on the fiduciary standard's impact on investors, the capital markets and society; and
  • Margaret Raymond - Panelist - Vice President of T. Rowe Price Group, Inc. and T. Rowe Price Associates, Inc. and managing counsel with a focus on legal matters relating to retirement savings, including ERISA fiduciary principles and other retirement plan administration topics.

 Some of the many topics to be addressed include the following:

  • Features of the Fiduciary Rule and how different market segments are likely to be impacted;
  • Past, present and future characteristics of the IRA marketplace;
  • Use of robo advisors;
  • Product availability and asset allocation, post regulation; and
  • Legal challenges being filed to forestall the implementation of the DOL Fiduciary Rule.

For further information and to register, click here. A special thanks to Dr. Dubravka Tosic and Attorney Gregory Jacob for putting this event together and arranging for continuing education credit.

Public-Private Retirement Plans and Possible Fiduciary Gaps

Hot off the press, a study from Pew Charitable Trusts ("Pew") examines retirement benefit planning by geography. Key takeaways from "A Look at Access to Employer-Based Retirement Plans in the Nation's Metropolitan Areas" and a summary by Pew's Director of Retirement Savings, John Scott, include the following:

  • At least four out of ten full-time employees work for private companies that do not offer a retirement plan;
  • Where one works can influence whether an individual has access to an employer-provided retirement plan;
  • Data shows that access is lowest in Florida, Texas and California; 
  • Access is typically lower for employees of small companies;
  • Workers who earn more than $100,000 per year generally have greater access to an employer-sponsored plan than individuals who earn less than $25,000; and
  • Underserved employees (in terms of access to a company-provided retirement plan) are clustered in large cities.

These insights validate what many know. Millions of people worldwide are not saving enough by far for retirement. One response (not surprisingly) is for government involvement to encourage individuals to save more. On November 16, 2015, the U.S. Department of Labor ("DOL") announced its proposed regulation to enable states to facilitate retirement plans for uncovered private sector employees without being subject to the Employee Retirement Income Security Act ("ERISA"). Read "State Savings Programs for Non-Government Employees" for details.

As the result of this suggested safe harbor (as I don't believe the DOL regulation has been passed yet), lots of states are jumping on the retirement bandwagon. Besides the State of Washington, California and Illinois require or encourage mostly smaller employers to offer a plan or engage in getting their employees to join a state network.

Not everyone is shouting with glee. According to "Initiatives for private-sector retirement moving to states" by Hazel Bradford (Pensions & Investments, January 25, 2016), certain financial service organizations fear increased compliance costs due to a patchwork approach across fifty states. Another concern is whether participants in newly formed state programs will be adequately protected. Even if a state private-public program is run by those who have sufficient experience and knowledge, will they be held to a fiduciary standard? If not, why not? If so, how will the fiduciary standard compare with ERISA norms if ERISA does not apply? In my discussions with several persons involved in this area, they too share the concern about a fiduciary gap.

Consider the case of Connecticut. After threatening to veto the bill to create the Connecticut Retirement Security Board in mid May 2016, the Nutmeg State's governor signed the act on May 27 with operations planned to commence in 2018. According to the original text for sHB 5591, if an employee does not "affirmatively opt in" then a "qualified" employer must enroll each employee and deduct three percent of taxable wages "up to normal IRS limits." An employee can opt out by indicating a contribution level of zero. The chairperson and other directors of the Connecticut Retirement Security Board will be selected by the governor in concert with the General Assembly. The board members must "act with care and solely in the interests of the program participants" with power given to the attorney general to "investigate violations of this requirement and to seek injunctive relief regarding violations." Board members are to have "protection from individual liability."

I will defer to attorneys to hash the legal niceties about individual state endeavors to assist private company employees. From a governance perspective, I belief strongly that private company employers, plan participants and taxpayers must have answers to critical questions such as those listed below:

  • How will board members be protected? If they are to be covered by some kind of liability insurance policy, who will pay the premiums and determine the adequacy of coverage? Will taxpayers be asked to pay anything if something goes awry and the insurance policy is insufficient?
  • Who will monitor the performance of board members to assess possible conflicts of interest?
  • Will board members be term limited?
  • Will board members be compensated and who will pay their compensation?
  • In the event of a major snafu, do participants have any redress? If so, to whom and on what basis? Litigation? Mediation? Arbitration? Other?
  • When would board members act as fiduciaries? Will their actions be evaluated on the basis of state trust law? If so, how does the state trust law compare to ERISA fiduciary duties? Weaker? Stronger? Same?
  • Would individuals have stronger protection if they transact directly with a financial service company and open up an IRA on their own?

In the aftermath of the passage of the U.S. Department of Labor Fiduciary Rule (acknowledging several legal challenges just filed), the concept of fiduciary duty is foremost on the minds of numerous industry executives and policymakers. Will public-private retirement plans receive the same scrutiny or is there a fiduciary gap? If the latter, who is on the hook in case of a problem?

Investment Return Expectations and Wishful Thinking

When it comes to strategy games, count me in. Bridge and Scrabble are two of my favorites except when it looks like I have little chance for victory. It's one thing to lose a hand or two but feel confident in a possible win. It's altogether depressing to know that recovery is unlikely. This happened a few days ago when my husband added an E, U, A and L to create a cluster of words that scored him sixty-seven points. Ouch. Even with lots of high point letters, I knew that besting his bonanza move was improbable. Each time we play, I begin on an optimistic note and hope for a favorable outcome until that moment when I know it's time to recast my calculations.

It's good to wish upon a star yet just as important to distinguish fantasy from fiction. That's why I was surprised to learn the results of a recent study of 400 institutional investors about their performance predictions. Carried out by State Street Global Advisors ("SSGA"), in conjunction with the research arm of the Financial Times, main takeaways from the "Building Bridges" study include the following:

  • Traditional asset allocation models may be unable to generate a long-term average rate of return of eleven percent, certainly without forcing buyers to take on more risk.
  • Forty-one percent of survey-takers expressed a preference for "traditional" classifications of asset exposures versus factor or objective-driven identifiers.
  • Eleven percent of those in search of closing "performance gaps" rank smart beta strategies as most important and 38 percent of institutional investors will employ this approach alongside other activities. "Significantly, three-quarters of those respondents who have introduced smart beta approaches found moderate to significant improvement in portfolio performance."
  • Enlightened decision-makers are finding it hard to get board approval of "better ways to meet long-term performance goals" and peer groups are slow to follow suit.
  • Eighty-four percent of pension funds, sovereign wealth funds and other asset owners believe that underperformance is likely to continue for one year.

As Market Watch journalist Chuck Jaffe somewhat indelicately points out in "An overlooked investment risk: wishful thinking" (May 18, 2016), long-term investors are daydreaming if they believe they can regularly generate eleven percent per annum. He quotes Lori Heinel, chief portfolio strategist at SSGA, as acknowledging the difficulty of achieving this number, given "a really challenging growth outlook, inflation environment, and a really challenging investment return environment." Notably, it was only a few weeks ago when the special mediator for the U.S. Treasury Department sent a letter to Central States Pension Fund trustees, denying a rescue plan in part because its 7.5 percent annual investment return assumptions were not viewed as "reasonable."

As I described in an earlier blog post entitled "A Pension Rock and a Hard Place," public pension funds, union leaders, taxpayer groups and policy-makers are navigating choppy asset-liability management waters. They are not alone. Corporate plans, endowments, foundations and other types of institutional investors are likewise challenged with getting to their destination and not crashing on the rocks. My unrealistic expectations might lose me a game. For long-term investors, there is serious money at stake and model inputs are being scrutinized accordingly.

Corporate Finance and Pension Restructuring

As I wrote in "Pension risk, governance and CFO liability" for the Journal of Corporate Treasury Management, "Unchecked pension problems are increasingly wreaking havoc with merger, acquisition or spin-off deals." This notion that corporate finance and human capital issues are intertwined shows up in many other situations as well. When part or all of a workforce is unionized, there is the added complexity of collective bargaining as a decision point and what this means for a sponsor seeking to restructure a benefit plan.

Pfizer Inc. (ticker PFE) is a recent example. Articles in FiercePharma and elsewhere describe how this jumbo pharmaceutical company is gradually phasing out its traditional pension plan in Ireland and offering a defined contribution plan in its stead. The trade union Siptu has taken legal action, refuting Pfizer's assertion that the defined benefit scheme is too expensive to sustain. Click to visit the website of the Services Industrial Professional and Technical Union to read its various press releases about Pfizer.

As with other disputes, facts and circumstances must be evaluated. Nevertheless, we are reminded once again that shareholders and pensioners are not always looking at things through the same lens.

The DOL Fiduciary Rule, Seller's Exception and Independent Fiduciaries

How does a service provider determine whether it is making a recommendation to "independent fiduciaries of plans and IRAs with financial expertise?" This is a key question that could determine whether an organization or individual is tagged as an ERISA fiduciary and subject to added liability as a result.

According to "Chart Illustrating Changes From Department of Labor's 2015 Conflict Of Interest Proposal To Final," one of several modifications includes the following: "Providing an expanded seller's exception for recommendations to independent fiduciaries of plans and IRAs with financial expertise and plan fiduciaries with at least $50 million in assets under management is not fiduciary advice."

As always with legal issues, I defer to knowledgeable attorneys to parse this language. However, given an implementation deadline, compliance professionals of firms that sell to ERISA plans and IRA owners no doubt want to clarify definitions and concepts such as "independence" and "financial expertise."

One attorney with whom I spoke suggested the intent is to lower the chance of a conflict such as when a fiduciary receives compensation for a vendor or product he helped put in place. Another attorney put forth the notion that fiduciaries of a "larger" plan (in this case, a trust with assets above $50 million) could be seen as more "sophisticated" and "informed." I'm not convinced that the ambiguity of the final language can be dispatched without addressing a series of questions, some of which are listed below.

  • Is a consulting firm that seeks an exception and wants to sell its delegated investment management or Outsourced Chief Investment Officer ("OCIO") services thereby prohibited from pitching any of its own proprietary products and using them if it wins a contract?
  • When a C-level executive such as a Chief Financial Officer sits on a plan investment committee, who will assess whether her decisions are made solely in the interest of plan participants and not to plump up a bonus tied to a particular decision or outcome?
  • Can a seller avoid fiduciary classification if the client is a plan or IRA with assets less than $50 million but managed by knowledgeable fiduciaries?
  • Might a seller fail to procure an exception if it is later shown that a plan or IRA with more than $50 million in assets is "large" but managed by fiduciaries who do not possess financial expertise?
  • How do sellers intend to determine whether "financial expertise" exists and can they do so without insulting potential buyers?
  • How will existing "know your customer" guidelines change to accommodate the notion of "financial expertise?"
  • How do regulators intend to determine whether "financial expertise" exists?
  • If there are multiple fiduciaries and some possess "financial expertise" but others do not, is the seller at risk for losing the exception or not obtaining it in the first place unless it can verify that all in-house fiduciaries are competent?
  • If a plan fiduciary or IRA owner or manager changes, does the seller need to assess "financial expertise" for the replacements? Does the U.S. Department of Labor need to do likewise? 
  • On what basis is the $50 million determined? At a point in time or as a rolling average? Are assets to be based on market value or book value or something else? Will regulators review Form 5500 numbers to determine if the $50 million test has been met?

If anyone knows of an article or webinar that addresses these issues, please kindly email contact@fiduciaryleadership.com. I would like to share resources about "independence" and "financial expertise" with readers of Pension Risk Matters.

Note: Interested persons can click to download "Pension risk, governance and CFO liability" by Dr. Susan Mangiero (Journal of Corporate Treasury Management). The phone number listed on the article is not current. 

Fiduciary Certification and Training

Last week, I had the pleasure of speaking to Dr. Anna Tilba with the Newcastle University Business School in the United Kingdom ("UK"). A mutual colleague had suggested we speak since we both work in the governance area. Dr. Tilba has studied the fiduciary practices of investment intermediaries. Her report fed into the UK's Law Commission publication about current fiduciary standards and areas for improvement.

One of the topics that arose during our conversation was the need for adequate fiduciary education and what she referred to as the professionalism of investment stewards. I agree that having experienced and knowledgeable individuals in place is critical. Even if the intent is to outsource certain services to others, investment committee members are tasked with making an informed decision about what to delegate and to whom.

Stateside, the U.S. Department of Labor ("DOL") continues its Fiduciary Education Campaign. Each seminar covers topics such as those listed below:

  • Comprehend the nature of each ERISA plan offered;
  • Apply rigor in selecting and monitoring service providers; and
  • Steering clear of prohibited transactions.

DOL website visitors can access something called the ERISA Fiduciary Advisor for information and answers to questions about duties. It's a tool that should help beginners although the DOL cautions that content is not "intended to be a substitute for the advice of a retirement plan professional."

So far, there is no uniform set of answers to questions such as the following:

  • How should in-house fiduciaries be selected?
  • How should in-house fiduciaries (individually and as a group) be assessed in terms of demonstrating procedural prudence?
  • Should in-house fiduciaries receive a bonus for achieving certain plan-specific goals?
  • Does everyone on an investment committee need to be equally proficient in a particular subject area or should someone serve as a Sarbanes-Oxley type of "financial expert?" 
  • Do in-house fiduciary term limits make sense?
  • How do variables such as plan design and characteristics of the workforce impact the kind of fiduciary education needed?
  • How should training differ for small to medium sized plans as addressed by the "Report of the Working Group on Fiduciary Education and Training?"

The good news is that data exists to benchmark myriad types of retirement plan decisions in terms of process and not just outcomes. Furthermore, there is a large array of training opportunities. Click here to download the "Retirement Plan Professional's Designation & Certification Guide" to learn about several dozen available offerings. Note that this document has a 401k focus. The bad news is that not all programs are created equal in terms of topic coverage. Even if they were sufficiently similar, facts and circumstances for a given retirement plan often dictate the need for specialized training not required elsewhere. 

Although fiduciary training is uneven across plans, sponsors and geographic location, I predict that lawmakers here and outside the United States will eventually impose universal certification requirements for retirement plan fiduciaries. I don't think a "one size fits all" approach to fiduciary training is ideal but political pressures will almost surely prevail. As the collective pension crisis worsens (and I acknowledge that lots of plans are in great shape), participants and taxpayers will want to know who was in charge of troubled schemes and how they made decisions. Proverbial heads tend to roll when voters' wallets shrink.

Hard to Value Assets, Hedge Funds and Investment Fiduciaries

As I have pointed out on multiple occasions, valuation is an integral part of investment risk management for several reasons. First, fees paid to asset managers are frequently linked to performance and performance calculations depend on reported values. If values are artificially inflated, returns are likely to be inflated as well. Second, imprecise values can skew asset allocation decisions, lead to hedges being too big (or too small) and possibly cause an investor to breach trading limits that are part of an Investment Policy Statement. It's no surprise then that valuation process questions about who does what, when and how continue to surface.

According to a May 9 Wall Street Journal article, the U.S. Securities and Exchange Commission ("SEC") is investigating "the way hedge funds value their thinly traded holdings and how they respond when investors ask for their money back." The SEC has been vocal about its concerns regarding asset valuations for awhile. In December 2012, Bruce Karpati, then Chief of the Asset Management Unit of the SEC Enforcement Division (and now in private industry), talked about a focus "on detecting fraudulent or weak valuation practices - including lax valuation committees and the use of side pockets to conceal losing illiquid positions - and the failure to follow a fund's stated valuation procedures." Click to read "Enforcement Priorities in the Alternative Space." (As an aside, some hedge funds buy and sell actively traded securities for which there is a ready market and full price transparency.)

The U.S. Department of Labor ("DOL") regularly broadcasts its concerns about "hard to value" assets, including financially engineered products that show up in certain defined benefit and defined contribution retirement plans. In September of 2008, I spoke before the ERISA Advisory Council, by invitation, to address valuation issues from the perspective of a trained appraiser and fiduciary best practices expert. Click to read "Testimonial Remarks Presented by Dr. Susan Mangiero." I talked at length about valuation questions to ask of service providers and procedural prudence considerations for institutional investors.

A few weeks ago, senior attorney Fred Reish addressed monitoring and uncertainty in his April 19, 2016 newsletter. He directed readers to Fiduciary Rule preamble text that urges an advisor and his financial institution to install an adequate monitoring process before recommending "investments that possess unusual complexity and risk, and that are likely to require further guidance to protect the investor's interests." Click to read "Interesting Angles on the DOL's Fiduciary Rule #1." It doesn't take a rocket scientist to conclude that a "complex" and "risky" investment could be hard to value and not particularly liquid. (I have purposely not defined the terms in quotes herein as they are often related to facts and circumstances for a particular investor.)

Expect to read more about this important topic of valuation, especially as applied to those investors in search of higher returns. In a "no free lunch" world, risk and return go hand in hand. It's not necessarily a bad thing to take on greater risk as long as there is an understanding at the outset as to what gives rise to uncertainty and how risks are being mitigated.

Fiduciary Rule and Small Businesses

Given the newness of the U.S. Department of Labor ("DOL") Fiduciary Rule, many still have questions about both content and implementation. One such inquiry arose during a workshop I was asked to create for members of the CT chapter of the National Institute of Pension Administrators ("NIPA"). During our discussion, an audience member wondered out loud if small businesses would be sufficiently overwhelmed that they decide to jettison plans to offer benefits to employees. The reasoning is that compliance costs could dwarf any perceived upside associated with creating retirement arrangements for workers.

As we celebrate National Small Business Week from May 1 through May 7, 2016, the issue of disproportionate impact is certainly relevant. As with any regulation, there are winners and losers. Critics have been vocal about what they see as flaws. Last June, the U.S. Chamber of Commerce released a report entitled "Locked Out of Retirement: The Threat to Small Business Retirement Savings" that predicted a fallout for small business owners who "provide roughly $472 billion in retirement savings for over 9 million U.S. households" via SEP and SIMPLE-type IRA plans. Its author, Drinker Biddle & Reath LLP attorney Bradford Campbell, wrote that "Main Street advisors will have to review how they do business, and likely will decrease services, increase costs, or both." As the U.S. Department of Labor Fact Sheet points out, the final rule covers IRAs, 401(k) plans and many other types of employee benefit plans, some of which were already regulated pursuant to the Employee Retirement Income Security Act of 1974.

Talk about deja vu. Investment News just published an article about the Fiduciary Rule effect on small broker-dealers as relates to documentation and other elements of compliance. The author, Attorney Ross David Carmel, worries that the DOL Fiduciary Rule could be catnip to the plaintiffs' bar because it is vague, "with no definition of best interest or reasonable compensation." He adds that increased costs will likely be passed along to consumers. Of course, buyers of any services have the right to decline or go elsewhere if competitors are willing to sell.

Only time will tell how things materialize for companies that rely on IRAs and will therefore be impacted by the Fiduciary Rule. In aggregate, economic consequences could be large if small business compliance hits the bottom line hard. Statistics from the U.S. Small Business Administration website show that 28 million small businesses contribute 54 percent of U.S. sales.