New Regulation Could Hinder Retirement Investment for Small Business Employees

Critics say Department of Labor rule will have unintended consequences

President Obama with Labor Secretary Thomas Perez / AP
February 18, 2016

The Department of Labor has proposed a rule that would restrict what advice a financial expert could give to employees, a move that would drive up costs and limit the types of retirement plans offered to those who work at small businesses, according to critics.

In April 2015, the Labor Department proposed a new rule under the Employee Retirement Security Act that would give the department regulatory authority over financial advice concerning Individual Retirement Accounts, known as IRAs.

This rule would require that financial advisors who work with small businesses be held to a fiduciary standard, which means putting their clients’ interests before their own. "It’s a very simple principle: You want to give financial advice, you’ve got to put your client’s interest first," President Obama said two months before the rule was proposed.

David Hirschmann, president and CEO of the U.S. Chamber’s Center for Capital Markets Competitiveness, said that while he agrees with the overall goal of the rule, there are clear problems with the way it has been proposed.

"There is no disagreement with us on the overall goal the Department of Labor has of trying to put clients first and [having] clearer standards to make it easier for investors to understand what they’re dealing with in the marketplace," Hirshmann said.

"Despite [the] intentions, our view is the current proposal simply will not work, [it] won’t achieve the goals DOL has outlined and it will not make life better for those trying to save and invest," he said, using an acronym for the Department of Labor.

The rule would affect businesses with 100 or fewer employees by creating additional compliance requirements for the financial advisors that service them. Critics expect that financial advisors would stop servicing these small businesses because of the increased complexity, cost, and liability generated by the rule, which would then result in employees losing access to retirement options.

"What really drove us into action was the impact of the DOL’s proposal on small business, so it’s not just our strategy to try to change the rule, it is a fundamental challenge in the way they created this rule, which is small businesses will be left with less advice and higher costs in a world where we know they need lower costs and more advice," Hirschmann said. "So it’s exactly backwards when it comes to small business."

Proponents of the rule say that conflicts of interest between financial advisers and their clients cause those saving for retirement to lose money.

"A White House Council of Economic Advisers analysis found that these conflicts of interest result in annual losses of about 1 percentage point for affected investors – or about $17 billion per year in total," the Labor Department states.

But Hirshmann argues there is a larger problem. "One of the things that we identified early on was the lack of savings in this country, that too many Americans don’t get started saving soon enough and they don’t save enough."

"There is a $114 billion problem, which is the lack of making a decision to invest and save, the failure to take the step to save. [This problem] actually costs investors far more," he said.

Hirshmann was referring to a 2011 finding by National Economic Research Associates that consumers who do not have professional investment advice make investment mistakes that cost them $114 billion per year.

According to Hirschmann, the Labor Department rule is predicated on an assumption that businesses will comply with the rule in a straightforward way. He said that businesses will likely find ways around the rule instead of working with it.

"What we hear from folks everyday is look, given the legal risks, given the regulatory risks, given the uncertainty here, we’re going to find a way to engineer a way around using the DOL’s rules," he said, "or just find a way not to be caught in this web that the DOL is setting up not because the intent is bad, but because the approach they are taking will not work."