getTagNameMorningstarCorporate:blog/bigpicture
Solutions for Small-Company Retirement Plans
The benefits of open multiple-employer plans and automatic IRAs
I recently outlined the ways the U.S. retirement system is indeed in crisis and
how workers at small employers lose out in our
system. I’d like to propose two solutions to these challenges and
explore the lessons we can learn from the United Kingdom, which has a
retirement system that’s not too different from America’s. State-run automatic IRAs are just what they sound like: Workers are
automatically enrolled in Roth IRAs run by state governments. These
IRAs could be a boon for many workers, and they are currently in
various stages of implementation in California, Connecticut, Illinois,
Maryland, and Oregon. The state efforts mirror ideas the Obama administration proposed
for national automatic IRAs. These proposals offer increased access to
defined-contribution savings and automate retirement savings via
payroll deduction to mirror the experience of saving in a
workplace-sponsored 401(k), unlike regular IRAs. Automatic IRAs leverage key insights from behavioral finance:
Automatically enrolling workers will result in more people saving for
retirement, and automating savings through regular payroll deduction
will lead to more savings than if people were left to do it on their
own. These plans will undoubtedly induce many workers, who otherwise
might not do so, to save for retirement. In a multiple-employer plan, or MEP, several small employers can
band together to offer their employees access to a 401(k). These plans
benefit both the employer and employee. They spare smaller firms from
shouldering all the administrative costs associated with setting up
and maintaining a 401(k). And they allow employees to enjoy access to
a retirement plan they otherwise might not have had, along with the
benefits of lower fees found in larger plans. Lowering the barriers to setting up MEPs may induce more firms to
enter these arrangements, thus benefiting their workers. These
so-called “open” MEPs would make it easier for small employers to
sponsor plans and put them on level footing with larger employers.
Open MEPs were created as part of the Retirement Enhancement and
Savings Act of 2016, which was introduced during the previous session
of Congress. The proposal had bipartisan support in the Senate Finance
Committee, but never got to a vote. Open MEPs also could serve more workers than the traditional MEPs.
About 4.5 million workers are covered in defined-contribution plans
organized under the traditional model, according to a 2012 analysis by the U.S. Government
Accountability Office. Other countries who suffer from similar shortcomings in their
retirement systems have taken more aggressive approaches than the U.S.
The most-relevant example is the United Kingdom. As in the U.S., the retirement system in the U.K. is predominantly
employer-based. However, it does not suffer from coverage and
fragmentation issues in the way that the U.S. does. The retirement systems of the U.S. and U.K. share several features.
Both countries have a public pension system that provides a baseline
of support for retirees, and both feature workplace-sponsored
retirement savings plans that workers can use to make additional
contributions to supplement their public pension. Each country also
has a multitude of retirement savings plan providers, drawn from the
private sector. But as of 2012, employers in the U.K. have been required to
automatically enroll workers who earn more than 10,000 pounds in a
workplace-sponsored retirement plan. The requirement started with
large employers and has gradually phased in smaller employers. All
employers will be subject to automatic enrollment rules by early 2018. Workers in the U.K. can choose to opt out of automatic enrollment,
but relatively few do. Only 9% of workers opted out between October
2012 and March 2016, according to the U.K.’s National Audit Office. Pension coverage in the U.K. has increased as a result of automatic
enrollment, despite that requirement not yet being fully implemented.
And employee participation in employer-sponsored pension plans has
increased dramatically as a result of the requirement. About 8 million
workers have been enrolled in a workplace-sponsored pension plan since
July 2012, representing a quarter of the workforce in the
U.K. The share of workers participating in workplace pension plans
has increased to 78% in mid-2016 from 55% in 2012. Policymakers in the U.S. should
take steps to reduce the challenges workers at small employers
face saving for retirement and the challenges small employers
themselves face in setting up low-cost retirement plans. Open multiple-employer plans and automatic IRAs complement each
other; they aren’t substitutes. Adopting both proposals would greatly
improve the quality of U.S. retirement plans, as well as access to
these plans.Aron Szapiro
Unlinking retirement from employers with automatic IRAs
Joining forces with “open” multiple-employer plans
What we can learn from the U.K.’s revamped retirement system
How to connect a fragmented retirement system in the U.S.
Read more about multiple-employer plans and
automatic IRAs in our research paper “Small Employers, Big
Responsibilities.”
Get My Copy