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July 21, 2015 

Submitted Electronically – e-ORI@dol.gov and e-OED@dol.gov

 

Office of Regulations and Interpretations

Office of Exemption Determinations 

Employee Benefits Security Administration 

U.S. Department of Labor 

200 Constitution Ave., NW 

Washington, DC 20210 

Re: Definition of the Term “Fiduciary” (RIN 1210-AB32); 

 Best Interest Contract Exemption (ZRIN 1210-ZA25)

To Whom It May Concern: 

As representatives of small businesses that sponsor retirement plans or offer 

retirement products, we appreciate the opportunity to comment on the regulatory 

proposal issued by the U.S. Department of Labor’s (“DOL”) on April 20, 2015 

expanding the definition of fiduciary investment advice. While we understand the 

intent behind the proposed regulation (the “Proposal”) redefining the term 

“fiduciary” with respect to the provision of investment advice, we are very concerned 

about the negative practical impact the Proposal will have on small business 

retirement savings. 

INTRODUCTION

Small businesses make up 99% of all U.S. employers, and account for 63% of new 

private sector jobs, as well as almost half of all private sector employment and 

output.1 Like their large employer counterparts, small business entrepreneurs and the 

millions of workers they employ need retirement savings opportunities. Over half of 

small businesses with less than 100 employees offer retirement plans.2 In addition to 

 

1 See U.S. Small Business Administration – Office of Advocacy, Frequently Asked Questions, March 2014, 

available at https://www.sba.gov/sites/default/files/FAQ_March_2014_0.pdf.

2 Bureau of Labor Statistics, Retirement benefits: Access, participation, and take-up rates -Table 2. 

Retirement benefits: Access, participation, and take-up rates,1 civilian workers,2 National Compensation 

Survey, March 2014, http://www.bls.gov/ncs/ebs/benefits/2014/ownership/civilian/table02a.htm. 
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traditional pension plans and 401(k) plans, small employers also use simplified 

investment vehicles such as Simplified Employee Pension (“SEP”) IRAs and Savings 

Incentive Match Plan for Employees (“SIMPLE”) IRAs. SEP IRAs and SIMPLE 

IRAs are easy and inexpensive to set up, and do not impose ongoing administrative or 

reporting requirements on employers, allowing their focus to remain on growing their 

businesses. However, there are many small businesses that may not be able to offer 

retirement plans due to a lack of resources. Our primary concern with the Proposal is 

that the negative consequences of the rule would discourage retirement savings in 

small businesses rather than providing incentives and resources that are very much 

needed.

COMMENTS

As with large plans, there are a number of areas in the proposal that impact small 

business retirement plans either directly or indirectly. In particular, there are two 

major areas where the Proposal is particularly detrimental to small business retirement 

plans – the exclusion of small businesses from the Seller’s Carve-out and the BIC 

Exemption. Moreover, the Education Carve-Out, which replaces IB 96-1, makes it 

difficult for plan participants and investors to receive necessary assistance in choosing 

the right investments for their retirement savings. These issues are described in detail 

below.

The Seller’s Carve-Out Should Include Small Plans, Participants and 

IRAs. Under the proposal, there is a carve-out for advisors that are selling or 

marketing materials (“Seller’s Carve-Out”). However, this carve-out does not apply to

advisors of small business. The DOL seems to believe that small businesses are not as 

sophisticated as large businesses and, therefore, need additional protections. The 

validity of this rationale is based on faulty assumptions, and does not justify 

discriminatory treatment. There is simply no basis to assume that a fiduciary to a plan 

with 150 participants is financially sophisticated simply because the plan is a “large”

plan. The plan fiduciary may well be a person or a committee of persons who run the 

company, and who are very experienced in running their businesses, but may not have 

a background in investment finance. By contrast, a small business with 50 participants 

might itself be a financial advisor. Size is unrelated to the financial knowledge of a 

plan fiduciary, especially at a threshold of 100 participants. There is no rational basis 

for eliminating choice for all participants and IRA owners while retaining it for large 

plans.

Moreover, there is no evidence presented that a high level of financial 

sophistication is needed to understand that a discussion is a sales discussion if it 
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follows a basic disclosure that an advisor is selling a proprietary financial product, that 

the advisor is paid to sell the product, and the advisor is not providing fiduciary 

advice. This disclosure, similar to that the Department requires in the large plan carve 

out, is readily understandable to any recipient. The assumption that small plans, 

participants and IRA owners cannot understand the difference between sales and 

advice does not match the real world experience of our members and their employees. 

The Department can protect participants, IRA owners and small plans with the same 

kind of disclosures that it requires of large plans under the large plan carve out, but 

without eliminating their right to choose the services and products that best fit their 

needs.

The BIC Exemption will Increase the Cost of Providing Services to 

Small Businesses, if not Eliminating Access Completely. Because advisors to 

small businesses are not carved out of the fiduciary definition, they must change their 

fee arrangements, or qualify for a special rule called an “exemption” in order to 

provide services on the same terms as before. However, the new exemption proposed 

by DOL may not apply to small business plans. It does apply to individual owners of 

IRAs, but it is not clear whether this exemption is available for retirement plans –

including SEP and SIMPLE IRAs - that are being offered by an employer. Further, 

even if it does apply, the new exemption – called the Best Interest Contract (“BIC”) 

Exemption – would itself substantially increase costs for advisors due to its many 

conditions and requirements.

The reason the DOL regulatory package causes such significant change is that a 

fiduciary investment advisor under ERISA generally has engaged in a prohibited 

transaction if the advisor recommends investments that either pay the advisor a 

different amount than other investments, or that are offered by affiliates (for example, 

the advisor is connected with the insurance company that offers the investment). 

There are certain exceptions to these rules, called “prohibited transaction 

exemptions”, but as DOL has proposed the new rules, the exemptions generally 

won’t help financial advisors who are working with small businesses to set up plans. 

Therefore, it may be illegal for those advisors to get commissions or to recommend 

certain investments. 

This problem is highlighted in services for SEP and SIMPLE IRAs. One way 

advisors might try to comply is by charging a flat fee for their SEP or SIMPLE IRA 

services. However, many IRA vendors prefer not to charge a direct fee to account 

holders, and many account holders prefer not to pay flat fees, especially in small 

accounts where a flat fee may be a significant portion of the assets. Logically, a vendor 

must generate a certain amount of revenue from servicing a SEP IRA or SIMPLE 

IRA account to generate some profit from it, or it will not provide the service. If 
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advisors and vendors change to a flat fee model, they may actually charge more than 

before, to account for the risk and expense associated with changing their method of 

doing business. This potential loss of low-cost investment assistance was a one of the 

reasons why the DOL’s previous proposal to redefine fiduciary investment advice 

several years ago—a proposal that was ultimately withdrawn—raised objections from 

many within Congress.3 It is important to note, however, that some advisors may 

already be compensated in a manner consistent with the proposed DOL 

requirements, though this is less common in IRAs and small 401(k) plans. 

The Education Carve-Out Unnecessarily Restricts Investment 

Assistance and Harms Small Business Retirement Plan Participants. While the 

Proposal expressly permits education to be provided to plans, participants, and IRAs, 

the redefinition of asset allocation models that reference the plan’s investment options 

as fiduciary advice will significantly disrupt plan sponsor efforts to educate their plan 

participants and retirees about investment options. Many small businesses rely on 

trusted third parties to provide investment education to their employees. These 

efforts include providing asset allocation models that provide a recommendation on 

investments in various asset classes based on a plan participant’s age, expected 

retirement and risk tolerance. However, under the Proposal, any party who provides 

specific investment options for each asset class would be deemed an ERISA fiduciary. 

This significant modification from current rules, which allow for such information on 

a non-fiduciary basis, would harm investors, and particularly small business plan 

participants that likely have access to fewer resources. By disallowing any party to 

make the link between asset classes and specific investment options, the Department 

of Labor is forcing plan participants into the tenuous position of figuring out how to 

invest their own retirement savings, which increases the risk of them making poor 

choices. 

CONCLUSION

For the reasons stated above, we are very concerned that the Proposal will not achieve 

the Department’s goals of better protecting workers and retirees, but will instead 

 

3 See, e.g. Letter from members of the Congressional Black Caucus serving on the House Financial Services 

Committee to then-Acting Labor Secretary Seth Harris dated March 15, 2013, warning that the “if the reproposal reflects the Department’s initial fiduciary proposal it could disparately impact retirement savers and 

investment representatives in the African American community...We are particularly concerned about the 

effects these regulations will have on savers in [IRAs]. If brokers who serve these accounts are subject to 

ERISA’s strict prohibitions on third-party compensation, they may choose to exit the market...[i]f that 

occurs, it could cause IRA services to be unattainable by many retirement savers in the African American 

community.” 
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make it harder for small business employers and employees to access financial advice 

and increase retirement savings. We urge the DOL to make changes in the final rule 

that would undo the negative consequences mentioned above. Thank you for the 

opportunity to comment on this very significant rulemaking.

Sincerely,

Financial Services Institute

National Association of Insurance and Financial Advisors

Small Business & Entrepreneurship Council

Small Business Council of America

U.S. Chamber of Commerce