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.

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