Investment Professionals

Small Employer Plans (and their Workers) Need the Protections of the DOL Fiduciary Rule

 One benefit that employers often provide to their workers is access to a workplace retirement plan, such as a 401(k) or 403(b), to help workers save and invest for retirement. As sponsors of those plans, employers are responsible for constructing the plan menu of investment options from which their workers select to build their portfolios. Because workers are often limited to the investment options that their employers choose for the plan menu, workers depend on their employers to make careful and sound decisions about those investment options.

The cost and quality of investments offered by a plan can have a profound impact on a saver’s ability to grow their nest egg over the course of their career. If the investment options on the menu are high-cost or low-quality, workers would be limited to investing in options that are likely to underperform available alternatives, which may mean these workers retire with less money than they otherwise would have or that they need to work longer to hit their savings goals. Even small differences in costs or performance can add up over time. For example, a 1% annual reduction in returns, over the course of 35 years, could reduce the saver’s account balance at retirement by 28 percent.[i] This could mean the difference of tens of thousands of dollars lost.

Unfortunately, many employers do not have particular expertise in choosing plan menus. After all, most employers are small businesses whose main job is not setting up and administering retirement plans. And there is ample evidence that many employers create poorly constructed plan menus filled with high-cost, low-quality mutual funds that underperform. For example, a comprehensive study of retirement plan fees published in the Yale Law Journal examined the costs associated with more than 3,500 401(k) plans with more than $120 billion in assets,[ii] and looking at total plan costs, the authors found that investors paid, on average, 0.78% more in fees than participants in the lowest-cost plans did. Fees were so high in some plans that the excess costs incurred over time would consume the entire tax benefit of saving in a 401(k). Because fees cut into the ultimate returns investors receive, the unnecessarily high fees that many retirement savers in 401(k)s are paying are reducing their returns, undermining their ability to attain a secure and independent retirement.

So why do employers include suboptimal options in their plan menus? Because employers, especially small to medium sized employers, are not typically retirement plan experts, and they often rely on the investment recommendations of financial firms and their professionals who provide services to their plan.[iii] These financial firms and professionals are not typically legally required, under either ERISA or the securities laws, to recommend the best options for plans. Moreover, they often have conflicts of interest to recommend the options that pay them the most money, rather than the options that are the best for the employers’ workers. And it can be very difficult for employers to assess the nature or extent of these conflicts of interest, factor these conflicts of interest into their decision making, or independently assess the quality of the recommendations they receive.

Does ERISA address this problem?

No. Financial firms and their professionals who make investment recommendations to employers are not typically fiduciaries, with a legal obligation to act in the best interest of retirement savers. This is because there are several loopholes in a more than 45-year-old rule defining who is a fiduciary under ERISA by virtue of their providing retirement investment advice. Among other things, the rule requires the advice to be provided on a “regular basis.” Because recommendations to include certain investments in a plan lineup usually happen once, financial firms and their professionals are not considered fiduciaries. Similarly, the rule requires there to be a “mutual agreement” that the advice will form a “primary basis” for the investment decision. So, firms often include fine-print disclaimers in their materials stating that investors should not rely on the firm’s advice as a primary basis for the decision. As a result, financial firms and their professionals can act like they are providing advice in the retirement plan’s, and by extension workers’ best interest, without legally having to do so.

Closing these loopholes and requiring financial firms and their professionals to act as fiduciaries when advising plans will help to ensure that employers receive advice that is in their workers’ best interest and is not tainted by conflicts of interest. As a result, employers would receive recommendations to include higher-quality, lower-cost options in their retirement plan menus that improve retirement outcomes for their workers.

Does the SEC’s Regulation Best Interest address this problem?

No. Reg BI does not apply to brokers’ recommendations to workplace retirement plans. It only applies to recommendations to retail customers who seek to receive services primarily for personal, family, or household purposes. In adopting Reg BI, the SEC took the position that a workplace retirement plan would not meet this standard. In contrast, Reg BI does apply if a broker provides an investment recommendation to a plan participant (i.e. a 401(k) saver), since a 401(k) saver would meet this standard.[iv] Ironically, in the retirement plan context, this creates a lack of uniformity for brokers where they could be subject to different standards based on the advice recipient’s capacity and purpose for receiving investment recommendations. For example, if a small business employer in their capacity as plan sponsor receives a recommendation to include certain investments in their retirement plan, they would not receive Reg BI’s protections. However, if in the same conversation they receive a recommendation to invest their own 401(k) in certain investments in the plan, they would receive the protections of Reg. BI. This creates a lack of consistency for broker-dealer standards and is likely to lead to significant confusion for employers, who should not be expected to understand these fine distinctions.

[i] U.S. Department of Labor, A LOOK AT 401(K) PLAN FEES,

[ii] Ian Ayres & Quinn Curtis, Beyond Diversification: The Pervasive Problem of Excessive Fees and “Dominated Funds” in 401(k) Plans, Yale Law Journal, March 2015,

[iii] See, e.g., ARA, (“Broker-dealers routinely advise fiduciaries of small retirement plans concerning the investments that will be made available to participants under such plans. Like individual investors, most small plan business owners acting as retirement plan fiduciaries are not sophisticated investors. Most simply do not have retirement plan investment expertise.”).

[iv] See, e.g., Rebecca Moore, How the SEC’s Reg BI Will Affect Retirement Plan Sponsors and Participants, Plan Sponsor (January 6, 2020),