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Personal Finance

Businesses Fight for Their Right to a Lousy Retirement Plan

The government’s wonky-sounding “fiduciary rule” has started a bar brawl with Wall Street. Your 401(k) may be in the middle.

If you work at a small business, this Bloomberg data visualization may be hard to look at. It lets you compare your retirement plan with those offered by the largest companies in the U.S. And while America's biggest companies are often quite generous to employees, its smallest companies are notorious for lousy 401(k)s. Small plans typically charge fees five or six times as great as those of large plans.

So it's surprising to see lobbyists fighting changes to the current retirement system and using small businesses to back their case.

The U.S. Chamber of Commerce and financial services trade groups yesterday filed a federal lawsuit (PDF) in Texas against the U.S. Department of Labor. The plaintiffs' goal is to scuttle the "fiduciary rule," which would require financial advisers to put their customers' interests first for retirement accounts.

The Obama administration says investors are losing $17 billion (PDF) a year due to financial advisers' conflicts of interest. Wall Street groups say the rule would increase compliance costs and open them up to more lawsuits, raising the cost of providing financial advice. And that, they argue, could make it even more difficult for small businesses to offer affordable retirement plans to their employees.

"We have determined the rule will have serious adverse consequences for American small businesses," said David Hirschmann, chief executive officer of the U.S. Chamber's Center for Capital Markets Competitiveness, in announcing the lawsuit. The Chamber joins not just Wall Street lobbying groups (the Financial Services Roundtable, the Securities Industry and Financial Markets Association) but also local chapters in Texas such as the Lubbock Chamber of Commerce.

Enlisting small-business groups is an "obvious ploy" to block a rule that would actually help small investors get a better deal from Wall Street, said Knut Rostad, president of the Institute for the Fiduciary Standard, an advocacy group. "It's ridiculous on its face."

Hirschmann said the fiduciary rule will raise costs for financial advisers, who will pass those costs on to Chamber members. "It's a benefit these small businesses want to be able to provide," he said.

There's no doubt that small businesses are at a disadvantage in the current system.

And it makes some sense that smaller plans would pay more. It costs money to set up and administer a 401(k) plan, and retirement regulations are complicated. Small businesses can't spread the costs out over thousands of workers.

But small-business owners also don't know whom to trust. Under current law, financial firms can reward advisers for pushing 401(k) plans with high fees or underwhelming investment options. Advisers aren't required to be clear about how they're getting paid. If you're running a restaurant or a plumbing business, you probably don't have the time or expertise to second-guess your financial adviser.

So small businesses miss out on much better options. Several companies now offer simple, low-cost 401(k) plans aimed at them. The result is that small businesses pay a wide range of fees, depending on the advice they receive. As I reported last year:

While the average small 401(k) pays annual fees of 1.5 percent to 2 percent of its assets, data from BrightScope show that some small plans pay less than 0.5 percent a year and others pay more than 3 percent or even 4 percent. Even a fee of a couple of percentage points “makes investing prohibitively expensive,” BrightScope President Ryan Alfred warns. “The sheer number of plans paying north of 2 percent a year in fees was shocking to us.”

Lower-cost options are multiplying, and the Department of Labor's new regulation seems to be driving this innovation. New product offerings and technologies are on the way, Rostad said. 

In January, investing startup Betterment launched a 401(k) product called Betterment for Business. It joins several firms already offering low-cost, simplified 401(k)s with easy-to-understand fees and low-cost investment options. Other providers of small-business plans include Employee Fiduciary, Ubiquity Retirement & Savings, and even the giant Vanguard Group. (For more, see: Small Companies Have No Excuse for a Lousy Retirement Plan.)

These new providers stand out not just because they're cheaper, relying on technology to lower costs. Unlike their older, established competitors, now fighting the fiduciary rule, they also promise to put their clients' interests first.

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