Labor Department takes a step to close retirement gap, but issues remain.
Give the U.S. Department of Labor an “A” for its intentions related to two November rulemaking initiatives to make workplace retirement plans more widely available. However, the department earns an “Incomplete,” at best, for its execution against its objectives.
In its first move, the DOL issued guidance to promote state-based multiple employer plans, or MEPs. Multiple employer plans permit small employers to band together to set up larger 401(k) plans that typically have lower fees than the firms could qualify for on their own—though previous Labor Department guidance had allowed only affiliated companies to establish MEPs. (One example would be small companies owned by a single holding company.) Now, according to the DOL, states will be able offer MEPs to employers that operate within their boundaries.
Second, the DOL offered guidance to states that have enacted or are considering legislation to establish auto-enrollment in Roth IRAs for employees who lack access to workplace retirement plans. Several states, including Illinois and Oregon, have enacted legislation to require employers without workplace retirement plans to auto-enroll employees in Roth IRAs. Supporters of these retirement initiatives estimate that another couple dozen states are considering auto-enrollment or other retirement initiatives.
Responding to the Gap
Both state-level initiatives respond to policymakers’ concerns about Americans’ inadequate retirement savings. The Employee Benefit Research Institute, or EBRI, estimates that Americans have a “retirement gap”—the difference between what they have saved and what they would need for a secure retirement—of $4.1 trillion. The Center for Retirement Research at Boston College estimates that the gap is about twice as large. Whatever the exact size of the gap, we know that it is enormous—and that if it is not addressed, relatively poor retirees will face low living standards and place significant strains on means-tested social welfare programs.
Experts generally agree that access to workplace retirement plans is a key factor in closing the retirement gap. Although employees without workplace retirement plans can make contributions to IRAs that are generally tax-deductible, relatively few of them do so. Among employees with incomes of $30,000 to $50,000, EBRI found that more than 70% save for retirement if they have a workplace retirement plan— but less than 5% did so if they did not have access at work. Unfortunately, at present the DOL estimates that about 68 million workers lack access to a workplace retirement plan.
To address these problems, the Labor Department issued rules regarding MEPs and the auto-IRA. The rulemaking came in two parts.
First, the DOL issued guidance indicating that states can offer their own MEPs. In an interpretive bulletin, the department stated that states can achieve the required “nexus” between employers to offer a MEP because of the state’s “unique representational interest” in the health and welfare of its citizens. This guidance does not constitute formal Labor Department rulemaking, so there is no opportunity for interested parties to provide feedback on the DOL’s approach.
The guidance would allow states to offer MEPs but not require employers to participate. The MEPs would be able to offer the features that other 401(k) plans may provide, including auto-enrollment and escalation (with an opt-out feature).