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Solutions for Small-Company Retirement Plans

The benefits of open multiple-employer plans and automatic IRAs

Aron Szapiro


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.

Unlinking retirement from employers with automatic IRAs

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.

Joining forces with “open” multiple-employer plans

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.

What we can learn from the U.K.’s revamped retirement system

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.

How to connect a fragmented retirement system in the U.S.

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.

Read more about multiple-employer plans and automatic IRAs in our research paper “Small Employers, Big Responsibilities.”  

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