Congress Weighs Bill to Level Field Among Retirement Plans

Congress is dusting off an old bill with some good ideas for improving retirement security. The Retirement Enhancement and Savings Act is a reboot of the 2016 version of the same name. That bill that was notable for passing out of committee 26 to 0--a rarity for Congress in today's polarized political environment. Although it is not guaranteed, the bill has a pretty good chance of becoming law before the end of this session, particularly since the top Republican and top Democrat on the powerful Senate Finance Committee introduced it together.

The bill is a laundry list of bipartisan ideas to improve retirement security--from reducing liability for annuity offerings to lifting age limits on contributions to IRAs. The most important provision would allow more employers to band together to offer 401(k)s by making some long overdue tweaks to the law that could have a big impact.

Offering higher quality retirement plans is a real struggle for smaller employers today. As we discussed in a recent Morningstar white paper, we have a two-tier retirement system: one for workers at large firms that is good and getting better, and one for everyone else that needs a lot of improvement.

The vast majority--more than 90%--of large companies offer a 401(k) plan, and these plans generally work pretty well. These large companies have the leverage to get institutional pricing for investment options, so those employees 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 4 times as much for management--and that's if they are lucky enough to have a plan. Less than half of small employers offer a retirement plan.

The gap in plan fees from large to small plans can make a big difference in savings over time, with investors in small plans about 20% worse off in retirement.

Multiple Employer Plans In a multiple employer plan, 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 them 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.

Multiple employer plans have been around for a while and cover 4.5 million people today. Two barriers keep them from being much more widespread. First, any one employer's fiduciary breach can mean the whole plan loses its tax-preferred status, which scares employers off. Second, unrelated employers generally cannot form a multiple employer plan today; they have to have some common nexus.

The Retirement Enhancement and Savings Act 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 plan, which the bill calls a pooled employer plan but most policy have been calling an "open MEP."

How It Works The plans in Congress are broad and require the Departments of Treasury and Labor to fill in many of the details. For example, the bill sets up new pooled service providers to administer open MEPs but provides a broad sketch of what they would do, while leaving the details up to Labor and Treasury. The agencies would issue regulations to elucidate which services these pooled service providers must offer and what they must disclose to employers that join them. The agencies will also have to provide regulations to ensure for an orderly transfer of assets from any noncompliant member employer.

That said, the bill makes a few important things clear. While the pooled service providers will 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 will only require multiple employer plans to fill out a single annual report, reducing administrative burdens.

There are a few other big questions about what these will look like in practice. Will 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 will these be sold? Will record-keepers take on the role of the pooled service provider and try to encourage small plans to join? Will existing brokers start different plans?

We'll be tracking developments, but if Congress passes the bill, it could help improve a major weakness in the U.S. retirement system by leveling the playing field between small and large plans.