Once again, Americans have an opportunity to make retirement savings history.
Enactment of the Employee Retirement Income Security Act (ERISA) provided new protections for retirement savers. The creation of individual retirement accounts (IRAs) and 401(k)s resulted in trillions of dollars in retirement savings.
Now, Congress is debating the Setting Every Community Up for Retirement Enhancement (SECURE) Act, possibly the most important piece of retirement legislation in generations. The House of Representatives earlier this year passed the SECURE Act and passage now awaits the Senate.
The goal is simply to provide more Americans with access to 401(k)s and other employer-sponsored defined contribution retirement plans.
It's a pressing need that has gone unmet for too long, especially for the millions of people who work for small businesses.
While nine in 10 workers employed by companies with 500 employees or more have access to retirement benefits, only 52% of employees of small businesses with fewer than 100 employees have such access, according to data from the United States Bureau of Labor Statistics1 Compounding the problem is that 46.8% of the private-sector workforce is employed by small businesses with fewer than 500 employees, the Small Business and Entrepreneurship Council2 reports.
The promise of the SECURE Act could change that dynamic. The potential advantages from the Act are many: cost savings and greater affordability for small businesses that offer retirement plans, reduced administrative burdens and greater fiduciary protection. Employers would have new incentives to offer annuities as part of retirement plans, enabling participants to turn their savings into a guaranteed income for life.
An important provision of the legislation would expand access to Open Multiple Employer Plans (MEPs) with the goal of making it easier for small employers to band together for the purpose of providing a robust retirement plan to their employees. Open MEPs offer smaller employers the opportunity to achieve greater economies of scale and thus achieve the cost savings, administrative relief and fiduciary protections necessary for many companies to offer a retirement plan.
However, the prospect of Open MEPs is an opportunity, not a guarantee. MassMutual recently published a white paper, "Open Multiple Employer Plans: What Open MEPs May Mean for Your Business," to provide insights for employers and financial professionals about making the most of Open MEPs. Whether smaller employers take advantage of Open MEPs depends upon their needs and preferences:
Start with the right plan design. Plan design decisions, including rules about eligibility and vesting, inclusion of auto-features and matching contributions and others, can play a significant role in how effective a retirement plan may be in enrolling participants, encouraging savings, and preparing workers to retire on their own terms.
Because Open MEPs are designed to streamline the process of offering and maintaining a retirement plan, participating employers may have limited choices when it comes to plan design. Employers are urged to carefully consider the plan provisions and whether they are a good fit for their specific plan goals and workforce demographics.
Decide on hands-on vs. hands-off plan administration. The time and costs of administering a retirement plan can sometimes discourage small businesses from offering one. By joining with other companies in an Open MEP, employers may have the opportunity to both ease the burden of plan administration and reduce costs by taking advantage of economies of scale.
However, choosing an arrangement that includes an experienced third-party administrator (TPA) can be crucial to achieving these benefits and in helping participating employers handle administrative responsibilities outside the Open MEP umbrella, such as IRS nondiscrimination testing and contribution limits, allocating employer contributions and forfeitures, calculating participant vesting percentages, and preparing loan paperwork. It's important to understand what support a TPA provides in helping to assess the needs of the business to minimize plan expenses and maximize successful retirement outcomes.
Choose limited vs. customized investment menu. The investment options available within a MEP are obviously a top consideration for an employer considering participation in the plan. The ability to combine assets under one universal umbrella may give MEPs the ability to offer lower-cost funds typically available only to larger companies with greater assets and more purchasing power. However, for ease of administration, some Open MEPs might require participating employers to choose from more limited options.
Open MEPs may require participating employers to use pre-selected investment menus, limiting employers' ability to tailor an investment lineup to meet all their preferences. Here again, advisors and small employers should carefully consider how an Open MEP limits investment choices and what level of customization may be available.
Determine fiduciary oversight. One of the most important benefits of MEPs is that they can reduce employers' fiduciary responsibilities, particularly as it relates to turning over control of selecting and monitoring investment options to a so-called 3(38) investment manager. This is in contrast to 3(21) fiduciary services, where an advisor recommends investment options for a fee.
Open MEPs could significantly expand access to retirement plans but it ultimately pays to understand how to make the most of the available opportunities. Financial professionals need to work closely with small businesses to determine their needs and understand their priorities before recommending an Open MEP as a solution.
Passage of the SECURE Act and with it the availability of Open MEPs could be one of the most important legislative achievements for retirement savings in decades. It could provide access to retirement plans to millions of additional workers and help them to start saving for retirement in a more meaningful way.
And history will be made in the process.
Teresa Hassara is Head of Workplace Solutions for Massachusetts Mutual Life Insurance Company (MassMutual®). Workplace Solutions provides defined contribution retirement plans and voluntary benefits for 35,000 employers across the United States.
1U.S. Bureau of Labor Statistics, National Compensation Survey: Employee Benefits in the United States (March 2015), available at: https://www.bls.gov/ncs/ebs/benefits/2015/ebbl0057.pdf 2Small Business and Entrepreneurial Council, Small Business Share of Employment, 2016 U.S. Census Bureau, https://sbecouncil.org/about-us/facts-and-data/
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