Inspired by our recent event Bridging the Retirement Divide: Reaching Small Business Owners and Workers, guest blogger David Morse of K&L Gates LLP weighs in on what he sees as the best ways forward.
Here’s a radical idea: instead of making it more difficult for small businesses to offer plans that help workers save for retirement, the federal government should smooth the path—or at least get out of the way.
Right now, roughly half of all U.S. employees, including 80% of those working at small businesses with fewer than 100 employees, lack access to a company-sponsored retirement plan. Experience clearly shows that absent participation in a plan, most people won’t sock away money in an IRA or other savings vehicle on their own. Perhaps the scariest statistic: almost half of U.S. adults say they don’t have sufficient rainy-day savings to cover a car repair, emergency doctor visit, or other unbudgeted expense. This is a brewing national crisis that will hurt the economy, strain government assistance programs, and cause enormous stress and suffering to American workers. While not much can be done at this point for unprepared baby boomers at the cusp of retirement, there are multiple opportunities to nudge other workers towards a prudent saving strategy.
Congress took a useful step forward in 2006 by making it much easier for employers to automatically enroll employees in a 401(k) plan and to then periodically escalate their savings rate. Putting savings on automatic pilot is a proven tool to help workers squirrel-away money—but it doesn’t do anything for workers at companies that don’t offer a retirement plan or auto-enrollment.
Ideally, we’d follow the lead of the UK and adopt a “NEST”-style national retirement program. Given that Congress at this point couldn’t agree on a Mother’s Day resolution, we need to set our sights on solutions that are less comprehensive, but more doable.
First, make it easier for employers, especially small employers, to join forces by adopting a retirement plan with a single administrative and investment platform in which outside vendors do all the heavy lifting.
Technically called a multiple employer plan (MEP), these retirement plans in-a-box entail minuscule risk and minimum maintenance to the business owners and give workers an excellent savings opportunity. The affordability and simplicity of MEPs rely on the scale achieved by allowing a private sector business or state to sponsor a program combining various employers. Unfortunately, current law makes MEPs more complicated than they need to be because the Department of Labor (DOL) imposes “affinity” requirements preventing businesses with nothing in common—other than wishing to help their workers—from joining the same program. Plus, the IRS interprets the tax law as requiring that all employers in a MEP must be punished if one employer violates an Internal Revenue Code’s tax “qualification” requirement. This “bad apple” rule unfairly punishes the innocent with the guilty. Regulatory tweaks by the DOL and IRS could easily remove these impediments. Additionally, Congress could further promote MEPs by eliminating any liability risk (other than properly enrolling employees and making plan contributions) on employers joining a MEP. Leaders in the retirement business know that plans are sold to, not bought by, small employers. Washington should make the sales pitch easier by reducing the regulatory burden faced by employers.
Second, Congress should amend the tax law to require that all 401(k) plans automatically enroll workers, while also offering a simple, anytime process to opt-out.
The reason: auto-enrollment is a proven highly successful way to get workers to save who might otherwise not have taken the trouble in electing to opt in. Importantly, the minimum default contribution rate should be set sufficiently high to avoid inadvertently pegging savings rates too low. Congress should also require employers offering a 401(k) to extend eligibility to part-time and seasonal workers. However, to be fair to business, the tax law should continue to allow employers to exclude these employees from employer contributions and in testing whether the plan passes the 401(k) nondiscriminatory contribution rules.
Third, encourage state and city auto-IRA programs for the private sector.
The first such program, OregonSaves, is successfully operating, and others in Illinois, California, Maryland, and Connecticut are in the works. These programs are modeled after the highly successful 529 college savings programs: a government-curated initiative to help private sector workers voluntarily save. Auto-IRAs are plans created by statute, supervised by an appointed board, and managed by private sector record-keepers, trustees, money managers, and the like. They provide for automatic enrollment of employees, with an easy employee opt out, and require that covered employers that don’t offer employees any other retirement plan option make the program available. While not a panacea, auto-IRAs can effectively operate under current law and could go a long way toward closing the employee savings gap—as long as Washington doesn’t get involved. Unfortunately, some members of Congress, spurred by lobbyists for the purveyors of high-fee mass market investment products threatened by a low-cost alternative, view the programs as over-regulated Big Brother socialism and/or a plot to shore-up underfunded state pension plans by robbing low-paid workers. In fact, it’s the reverse. Auto-IRAs are a fully funded, voluntary employee payroll savings program, which entails essentially no cost and minimal responsibility for businesses, while enabling workers to help themselves without having to take any action.
Perhaps the greatest challenge facing those financially unprepared for retirement is that too much is being asked of them. Most people cannot afford financial planners, and we all struggle with built-in behavioral biases that can lead to poor decision-making. Plus, most folks are unsuited by education, time constraints and/or disposition to work through the investment, longevity, inflation, health care, and many other risks involved in retirement planning. A FinTech approach could make it easier for people to make the right decisions without a PhD in economics. Indeed, financial innovators are exploring options to assist workers in accumulating rainy-day accounts, reducing retirement saving leakage, and generally nudging plan participants into making wise investment choices.
Thus, fourth, Congress and regulators need to be at the ready to allow creativity and experimentation without undue legal interference.
Many in the U.S. are already financially behind. Washington should make it easier for workers to help themselves prepare.
David Morse is an employee partner with K&L Gates LLP in their New York City office. Mr. Morse is currently advising a number of states and municipal entities concerning MEPs, auto-IRAs, and other government-enabled retirement programs. Mr. Morse has published extensively on retirement plan issues. He has served as editor-in-chief of the Benefits Law Journal since 2002 and is a fellow of the American College of Employee Benefits Counsel.
The views herein are solely those of the author and are not intended to provide legal advice.
The views and opinions of the author are his own and do not necessarily reflect the view of The Aspen Institute Financial Security Program or its funders.