Business owners who offer retirement plans could be one of the unexpected beneficiaries of the Department of Labor's
fiduciary rule, which is expected to be announced Wednesday.
Ron Rhoades, a lawyer and financial planner in Bowling Green, Kentucky, said that small business owners currently have little or no recourse against retirement plan consultants who recommend expensive, fee-laden plans. That's because many of those consultants work under the far less onerous (to them) suitability standard, rather than the tougher
fiduciary standard, which requires that some advisers put their client's best interest before their own.
The problem: A business owner who has sold a retirement plan for employees under the suitability standard could find himself being sued because of poor investment choices or high fees. The owner could file a claim of lack of suitability against the adviser, but that's tough to prove, Mr. Rhoades said.
Another disadvantage: A claim by a business owner against a consultant operating under the suitability rule could aim could be forced into arbitration, rather than the courts. “Any plan sponsor choosing a non-fiduciary adviser is an invitation to disaster,” Mr. Rhoades said.
Mr. Rhoades noted that the impending DOL rule will make 401(k) plans more popular with smaller companies, many of which opt for Simple IRA plans instead. “Now because you can rely on advice given you, a lot of the potential liability associated with starting and maintaining a 401(k) will go away,” he said.
And, he pointed out, 401(k) plans offer more flexibility options than Simple IRAs, which can be used for businesses with up to 100 employees. For example, 401(k) plans offer the ability to take loans and disability withdrawals and offer more flexibility for the employee match, Mr, Rhoades said.
The DOL rule won't apply to
403(b) plans, Mr. Rhoades said, because 403(b) plans are not covered by the Employee Retirement Income Security Act. A 403(b) plan is a retirement plan offered by some nonprofits (501(c)(3)), public education organizations and cooperative hospital service organizations.
Nevertheless, the new DOL rule should have some influence on 403(b) plans going forward. “I think that if you were the sponsor of a 403(b) plan, you'd want to pay attention to the DOL rule,” Mr. Rhoades said. “They suggest standards that ought to be followed.”
