Small businesses can be a solution to closing the retirement gap.
Is there at least a partial solution for the United States’ retirement gap? Policy changes to ease the formation of so-called multiple employer plans might be the rare bipartisan idea that, even given the current dysfunction in Washington, D.C., could come to fruition.
First, some background information: Experts do not agree on the size of the retirement gap in the United States—the amount of additional money Americans need for a secure retirement— but there is consensus that it is pretty large. Jack VanDerhei of the Employee Benefit Research Institute estimates the retirement gap at a little more than $4 trillion. Alicia Munnell, who runs the Center for Retirement Research at Boston College, believes it is nearly twice as large. To put those numbers in context, the Investment Company Institute reported that in 2014, there were about $24 trillion of retirement assets in 401(k)s, IRAs, defined-benefit pension, and other retirement accounts. In the aggregate, then, it’s likely that Americans need an additional 20% to 30% of investments for retirement.
It is hard to imagine that gap closing without increased access to workplace retirement plans. Although individuals who lack workplace retirement plans could, for example, fund IRAs on their own, few of them do it. Among those with a household income of $30,000 to $50,000, EBRI found that more than 70% participate in a workplace retirement plan when it is available, while less than 5% fund an IRA when a workplace plan is unavailable. Put another way, lower-middle and middle-class workers are 16.4 times more likely to save for retirement when they have access to a workplace retirement plan.
The lack of workplace retirement options particularly takes a toll on those who work for smaller companies. According to Jamie Kalamarides, head of Institutional Investment Solutions at Prudential and CEO of Prudential Bank & Trust, only about half of companies with fewer than 100 employees offer a retirement plan. This makes it hard to close the retirement savings gap, because nearly all of the country’s net job creation occurs within small businesses, according to Kalamarides.
This lack of workplace retirement options can have a particularly large, negative impact on minorities. According to Bennett Kleinberg, who is a vice president of Prudential Retirement, a business unit of Prudential Financial, a study in California found that about 75% of Hispanic employees lack access to a workplace retirement plan. “Covering the Latino population is an important factor in meeting America’s retirement challenges,” Kleinberg says.
Why don’t smaller companies offer retirement plans? Kalamarides said smaller employers usually cite concerns about costs, complexity, and liability. To address at least some of these issues, lawmakers from both parties would like to make it easier for smaller companies to band together to form a multiple employer plan, or MEP.
What Are MEPs Anyway?
Functioning as a single plan, an MEP allows two or more employers to provide retirement benefits to employees on a consolidated basis—allowing them to offer retirement plans that are normally available only to larger businesses. In grouping together several employers, an MEP allows providers to spread out risk and cost—giving each employer a more manageable portion of the burden—while providing higher-quality retirement options. Effectively, MEPs are designed to provide such benefits by leveraging economies of scale. Businesses can use MEPs to provide retirement options as a group, despite not being related as controlled groups, trades/businesses in common control, or affiliated service groups. In essence, this is seen as a way to overcome retirement gaps that threaten small-business employees.
It is important to draw a clear distinction between multiemployer plans, which have attracted a lot of news coverage in recent years, and MEPs. Multiemployer plans are generally offered by companies with unionized workforces and collective bargaining agreements. By contrast, MEPs can be sponsored by employers that may not have the same sorts of relationships and without a collective bargaining agreement in play. However, the flexible nature of MEPs means that they fall under several regulatory rules that can complicate matters.