Ed Murphy's Empower Retirement Post, 5 Policy Fixes

Five policy fixes to help small employers with retirement plans

Edmund F. Murphy III

More than 55 million working Americans — roughly half of all workers ages 18 to 64 — do not have access to an employer-sponsored retirement plan. Typically, these Americans work in the private sector for companies that employ fewer than 100 individuals.1

We need to solve this problem — one way or another. Research from the Lifetime Income Score V survey shows that access to an employer-sponsored retirement plan increases retirement income replacement rates by more than 30%.2

If the retirement industry, legislators and other stakeholders work together, more employers could offer retirement plans to more workers.

Policy changes for small employer retirement plans

Broad adoption of workplace savings plans for small employers may require policy changes that encourage small businesses to give their employees the opportunity to save for their future.

What can we do to solve this problem? Here are five ideas that Empower Retirement believes can help with this important goal:

  1. Develop a simplified starter 401(k). Small businesses operate very differently from their mid- and large-market counterparts. They don’t have the same resources to manage a workplace savings plan, but they should have access to a simpler solution that removes administrative burdens. This starts with eliminating expensive and time-consuming testing and limiting in-service withdrawals, which reduce the amount of savings available at retirement. This could ease plan administration and keep the plan healthy by minimizing asset reduction.
  2. Expand underutilized startup tax credits and make the credits refundable. Small businesses take time to get off the ground. Profitability, which may be minimal during the early years, eliminates the value of a nonrefundable credit. Additionally, the uptake rate of the current credits is low — approximately a half-million dollars annually.3 We have to increase these tax credits to improve uptake.
  3. Increase availability of multiple-employer plans. Small businesses have limited access to the multiple-employer plan (MEP) system. This is due to the Department of Labor’s stance that there must be some commonality among MEP sponsors. Under current IRS rules, a disqualifying event by a single sponsor can disqualify the entire MEP.  This further discourages adoption.
  4. Establish designated plan providers to oversee administration of MEPs. A designated plan provider (DPP) could assume many of the fiduciary responsibilities to eliminate concerns and fears small businesses have related to this role. The creation of DPPs would also encourage retirement service providers to fully engage in this market.
  5. Create a regulatory environment that encourages plan adoption and maintenance. Small businesses need a simple, limited-liability correction process that doesn’t result in overly punitive penalties or unwarranted windfalls to participants. Policy makers need to remove the administrative burden associated with termination and asset distribution of abandoned plans. Providers should be able to streamline, consolidate and deliver required notices in a manner that leverages evolving technologies.

Retirement service providers and policymakers should work in partnership to ensure that all working Americans have access to an employer-sponsored savings plan. Any one of the proposed ideas could help more employers provide a retirement plan for their workers. These ideas can also help us bridge the retirement access gap.

1 Source: AARP
2 Source: Empower Retirement, Lifetime Income Score V: Optimism and opportunity, March 2015
3 U.S. Senate Committee on Finance, The Savings & Investment Bipartisan Tax Working Group Report, July 2015

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