What the 2017 Fiduciary Rule Executive Order Means for Small Business 401(k) Plans
In February, President Trump issued an executive order directing the Department of Labor to review the fiduciary rule – an Obama-era construct set to take effect in April 2017 that required investment professionals to act in the best interests of their clients. The fiduciary rule mostly stood to affect investment professionals (think financial advisors and brokers), but it can also impact retirement providers – like small businesses.
If you’re a small business owner who offers or is thinking about offering a 401(k) plan, the financial consequences of the fiduciary rule roller coaster may have you worried. You want to provide the best possible 401(k) option for your employees, keep your own costs down, and stay on the right side of the law – and delaying the fiduciary rule can impact all three.
We’ll break down the fiduciary rule’s impact on small business, and what its delay – or outright elimination – can mean for your 401(k) plan.
The basics: Fiduciary standard vs. suitability standard
Back in 1974, the Employee Retirement Income Security Act (ERISA) defined minimum benefits employers must offer as well as how investment advisors (for example, the ones that advise funds for your 401(k)) must conduct themselves. ERISA’s goal was to ensure that employees received decent, transparent benefits, and required that fiduciaries (registered investment advisors, who manage others’ assets) have to act in their clients’ best interest. This includes preventing conflicts of interest and disclosing fees upfront. Retirement plan providers (often businesses) were on the hook for making sure their fiduciaries were ERISA-compliant.
Previously, ERISA’s requirement to put clients’ interests first only applied to registered investment advisors who charged a fee for service on retirement plans. Other financial professionals were held to a “suitability” standard – as long as their recommended investments met a client’s stated goals, they were in the clear.
In 2015, though, President Obama put the law under review; in April 2016, the Department of Labor recommended the definition of “fiduciary” be expanded to include brokers, financial planners, insurance agents and others who sell retirement funds. Instead of holding those professionals to the suitability standard, they now had to recommend the best possible funds for their clients.
The fiduciary rule was set to phase in from April 10th, 2017 to January 1st, 2018 – until an executive order from President Trump put its rollout in question. While he hasn’t delayed its implementation, without the Department of Labor’s support, the rule may not have legs. In its absence, ERISA would continue as it has since the 1970’s, holding registered investment advisors to the fiduciary standard and the rest to the suitability standard.
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What does the fiduciary rule – or its absence – mean for my employees?
First, let’s talk about how the fiduciary rule will affect employees if it’s implemented. In one sense, it’s good for employees. Some of the most common 401(k) fees, like load fees and 12b-1’s, would be eliminated – to the tune of $2.4 billion annually. The White House Council of Economic Advisers estimated that biased advice sapped $17 billion from retirement accounts every year, and the fiduciary rule would have removed certain expensive fees, and incentivized investment advisors to put their clients first.
But there’s a downside. If brokers are losing their load fees and other commissions, they’ll probably want to make up the money elsewhere. This could lead to investment advisors charging higher fees to administer and maintain retirement plans, costs that are often passed on to employees. From an employee’s perspective, paying a load fee is the same as paying an administration fee – both cut into retirement savings.
On balance, though, the fiduciary rule has generally been considered a good thing for employees. Even if plan administration fees rise while load fees fall, you’ll arguably get better fund performance because your brokers will point you to the highest-return options rather than the highest-commission ones – the rule enjoys support from investor advocates like the Consumer Federation of America.
So while some industry advocacy groups like the Financial Services Roundtable fought the fiduciary rule, it was mostly considered a step in the right direction as far as employees are concerned. Its delay or removal may mean higher fees for those who pay into retirement accounts.
What does it mean for my business?
When it comes to small businesses, ERISA is more controversial. On the surface, greater transparency and lower fees are unequivocally positive – but the burden of enforcing those guidelines has to fall somewhere, and often, that somewhere has been small businesses. Complying with ERISA adds administrative overhead to businesses that can ill afford it, while the risk of non-compliance can lead to additional expenses like ERISA fidelity bonds.
Moreover, shifting costs from commissions to plan administration fees hurts employers. Small businesses are especially vulnerable: Plans with less than $1 million in assets cost 1.6% on average, while plans with more than $1 billion cost just 0.3%. Since small businesses have less leverage to negotiate with, and no economies of scale, they’re far more vulnerable to an increase in administration costs.
There is a benefit, though. Losing commission fees may not necessarily mean higher plan administration fees, and if your business covers employee 401(k) fees, you may see lower costs. Generally speaking, though, the U.S. Chamber of Commerce and other pro-business groups have spoken out against the fiduciary rule, and it’s likely that a delay or outright removal will lower the cost of administering a 401(k).
Is offering a 401(k) still worthwhile?
Whether or not the fiduciary rule goes into effect as planned, a 401(k) is still a worthwhile investment for small businesses. It offers tax advantages to you and your employees relative to a salary increase, helps you retain and attract quality talent, and can be administered in a low-cost way.
Improving technology may also mitigate the impact of the fiduciary rule (or its absence). Automating benefits administration lowers the cost of offering retirement plans and staying in compliance, while robo-advising and other financial technology advances provide high-quality investment services at a much lower cost. As lifespans rise and the cost of administration falls, offering a 401(k) becomes increasingly attractive to small businesses.
So what can I do to offer a low-cost, trustworthy 401(k)?
Regardless of the fiduciary rule, your retirement plan goals are the same: Offer a 401(k) at a low cost to both you and your employees. Choose a plan administrator that leverages both automated paperwork and investment advice to deliver high-performing funds at an inexpensive price. Keep your employees’ best interest in mind too: Make sure the plan includes low-cost index funds. (In fact, the best predictor of a fund’s performance is a low expense ratio.)
Should I look for a fiduciary provider for my 401(k)?
The benefit of employing a fiduciary is knowing that his or her recommendations will be in your and your employees’ best interests. This can be particularly helpful for small businesses with small or no HR departments, who don’t have the resources to carefully audit providers’ recommendations. Since the Fiduciary Rule is in doubt, you may want to consider registered investment professionals who already choose to uphold fiduciary standards (like Human Interest!). As a small business owner, you want to take care of your employees, and that includes providing access to quality investment advice.
Of course, cost is always a consideration. Opting for a fiduciary can help you (or your employees) avoid hidden fees and broker commissions. If you want to find an affordable 401(k) that takes care of your employees, a fiduciary is a good place to start.
The fiduciary rule may roll out on time, be delayed, or never get implemented. But changing technologies and improved fee structures mean that 401(k)’s are still well within small business’ reach.
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