Congress is dusting off an old bill with some good ideas for improving retirement security.
A Senate proposal, known as the Retirement Enhancement and Savings Act, is a reboot of the 2016 version of the same name. The bill would make many small changes to the retirement system, but these long-overdue tweaks could have a big impact. For instance, the most important part of the bill would allow more employers to band together to offer 401(k) retirement plans. A House bill contains a similar provision, so there may be consensus on the approach to multiple-employer retirement plans.
While nothing is guaranteed, the legislative language in the Senate bill could become law this session. (It helps that the top Republican and top Democrat on the Senate Finance Committee introduced the measure.)
Let’s take a closer look at the Senate proposal for multiple-employer retirement plans.
What’s different for small employers when it comes to offering a retirement plan?
It’s a real struggle for small employers to offer higher-quality retirement plans, so anything Congress can do would be welcome. Our recent report looks at how there’s a two-tier retirement system in the U.S.—one in which workers at large firms are typically well-served by their plans, and another in which workers at small firms don't have plans or have plans that need a lot of improvement.
The vast majority—more than 90 percent—of large companies offer a 401(k) plan, and these plans generally work pretty well. Meanwhile, fewer than half of small employers (those with 50 or fewer workers) offer a retirement plan.
Large companies can get institutional pricing for investment options. Employees of the largest companies in the U.S. pay on average just 37 basis points for all-in retirement investment management, according to Morningstar’s analysis of public filings. In contrast, workers at small employers pay almost four times as much for management—and that’s if they are lucky enough to have a plan.
The gap in plan fees between large and small plans can make a big difference in savings over time, with investors in small plans about 20% worse off in retirement because of differences in investment fees.
How does the Senate’s proposal for multiple-employer plans help address the problem?
In a multiple-employer plan, or MEP, many small employers can band together to offer their employees access to a 401(k). These plans spare smaller firms from shouldering all the administrative costs associated with setting up and maintaining a 401(k) and give small plans banding together the leverage of a larger asset base to reduce investments fees for their participants. They may even encourage some small employers to offer plans because doing so would be easier.
MEPs have been around for a while and cover 4.5 million people today. However, there are two barriers keeping MEPs from being much more widespread that the Senate bill would remove. First, any one employer’s fiduciary breach can mean the whole plan loses its tax-preferred status, which scares off employers from offering plans together. Second, unrelated employers generally cannot form a MEP today. They have to have some common nexus.
The Senate’s bill would fix both these issues by 1) setting up a system to address employers that breach their fiduciary duty and 2) allowing unrelated employers to join a new kind of MEP. The bill calls this new type of plan a “pooled employer plan,” but most policy wonks refer to them as an “open MEP.”
Who would run multiple-employer plans?
The Senate bill would create new, pooled service providers who would administer open MEPs. The measure provides a broad sketch of what these providers would do, but leaves the details up to the Treasury and Labor departments. These departments would issue regulations to elucidate which services the pooled service providers must offer and what they must disclose to employers that join them. The departments also would have to provide regulations to ensure for an orderly transfer of assets from any noncompliant member employer.
Who would be the fiduciary for a multiple-employer plan?
The Senate bill would make a few important things clear. While the pooled service providers would be a fiduciary, each employer would still be responsible for picking and monitoring a pooled service provider and the plan’s investment lineup. Congress also would only require MEPs to fill out a single annual report, reducing some administrative burdens.
What issues related to multiple-employer plans would Congress leave to others to figure out?
There are a few big questions about what these open MEPs would look like in practice. For example, would all member employers of an open MEP use the same plan lineup? If so, what’s an appropriate set of investments for a wide range of employers? If not, does the arrangement offer any benefits as there is less leverage to get institutional pricing? Finally, at a practical level, how would these plans be sold? Would recordkeepers take on the role of the pooled service provider and try to encourage small plans to join? Would existing brokers start different MEPs? Congress is leaving these details up to the Treasury and Labor departments and the private-sector plan providers.
We’ll be tracking developments on the proposal. But if Congress passes a bill, it could help improve a major weakness in the U.S. retirement system by leveling the playing field between small- and large-employer plans.