In a move that many industry watchers said is long overdue, Congress is turning its attention to a number of issues related to retirement preparedness, including that of multiple employer plans for small and midsized businesses.
The latest discussion on the topic was a recent special hearing by the Senate Finance Committee. Entitled “Retirement Savings 2.0: Updating Savings Policy for the Modern Economy,” the event featured testimony from several leading retirement experts: John Bogle, founder and former CEO of the Vanguard Group; Dr. Brian Reid of the Investment Company Institute; Scott Betts from National Benefits Services; Dr. Brigitte Madrian, a professor at the John F. Kennedy School of Government at Harvard University; and Dr. Andrew Biggs, of the American Enterprise Institute.
Chairing the hearing was Senator Orin Hatch (R-Utah), who has proposed retirement reform legislation that calls for greater access to multiple retirement plans. Several speakers at the hearing praised Hatch’s proposed bill—Secure Annuities for Employees (SAFE) Retirement Act (S.1270)—as a big step in the right direction for aiding millions of Americans that are unable to effectively save toward retirement.
Some large employers currently participate in multiple employer plan offerings. The idea is for small and midsized businesses to be able to do so as well: pooling their participating employees under one plan, in both defined benefit and defined contribution form. In this manner, the primary fiduciary would be a financial service firm that designs the actual plan, not the individual employers.
Standing in the way of small and midsized employers from joining the trend have been the costs associated with forming such groups and administrative red tape.
“I was encouraged by the fact that it sounds like there is a lot of openness toward making it easier for multi-employer plans to be set up,” Brigitte Madrian said of the hearing testimony and Finance Committee reaction.
“I think that is great because having an employer plan is so important. The big preparedness gap tends to be among individuals who are either working part-time or working for small companies that don’t offer savings plans,” Madrian said. “Making it easy for the local chamber of commerce or an industry association to set up a multiple employer savings plan would be a real step forward.”
An economist by training, Madrian spends most of her time at the Kennedy School doing research on household financial decision making, specifically within the context of saving for retirement.
Her research includes “Examining how individuals make choices about how much to save; the importance of economics versus psychology; the importance of institutional factors like how the plan is set up; things like that,” Madrian explains.
What most encourages Madrian is that there appears to be strong bipartisan support for the idea of promoting multiple employer plans among small and midsized businesses.
“There also seems to be pretty widespread support for things like expanding automatic enrollments,” Madrian said. “The Pension Protection Act encourages automatic enrollments. That provision had bipartisan support when it was passed. Now that we have a few years of experience under our belts and many more companies are using it, I think there’s widespread agreement and support for expanding automatic enrollments.”
What Madrian does not foresee happening is making automatic enrollments mandatory for all businesses.
“Where I sense a little more disagreement – once again coming back to where are the coverage gaps – is with companies that don’t have a savings plan. What should we be doing to facilitate savings among the people who are working in those organizations?” Madrian said.
“Should it be to go the UK route, where we mandate that companies have to have automatic enrollment?” Or does the government not mandate automatic enrollment for individuals, but does so for employers over a certain threshold to automatically enroll their employees.
“My guess is that you’re going to have a hard time getting strong Republican support for mandating automatic enrollment,” Madrian said. “I think it would be easier to get support if there was a low-cost easy alternative.”
Madrian points to a distinction between Obamacare and universal retirement savings in that setting up a retirement savings plan for employees is typically going to be a lot less expensive than setting up a health insurance plan. The opposition might not be as strong. On the other hand, the Affordable Care Act is already reality.
“If it feels like a double whammy – you hit me with healthcare and now you’re hitting me with retirement savings and I haven’t even had time to get used to one before you’re hitting me with the other – I can imagine a fair amount of pushback,” Madrian said.
“I could see a more incremental strategy, which would be, OK let’s make it easy to have multiple employer plans and let’s see how far that goes in solving the coverage. If 5 or 10 years down the road a lot of these have cropped up, that they’re low cost, that they’re easy for employers to participate in, then it might then become politically easier to mandate that employers offer a savings plan with automatic enrollment if you’re above some size threshold.”
Dr. Andrew Biggs agrees with Madrian that expanding multiple employer plans could become reality in the near future.
“It was clear that one of the issues on their mind was whether having a tax deduction for retirement savings is a valuable thing or not and there have been proposals to cap the taxability of retirement savings contributions,” Biggs said “I think they’re going to have a hard time pushing that through, especially if the Republicans pick up seats in the Senate and the House.”
On the other hand, Biggs could see action on the non-controversial multiple employer plan bill as an easy way for Congress to demonstrate action on what is a broadly nonpartisan topic anyway.
“This could be a small thing they could do, to actually show that they can do something,” Biggs said
More importantly, Biggs said. “Having it offered through your employer tends to facilitate retirement savings, so, sure, I’d like to see more of that. The employers that can’t offer retirement plans are small employers for whom the fixed costs are very high. So for smaller employers, the need is in making them easier and cheaper to start.”