Currently, there is a flurry of activity, both at a federal and state level, to address one of the largest economic conundrums facing the country. According to the report issued by the Government Accountability Office in 2013, 42 million, or roughly one-third, of all private-sector workers are employed by small businesses (defined as less than 100 employees). Yet, only 14% of these businesses maintain a retirement program.
The availability of a workplace program, however, is no guarantee of a secure future. In the most recent Retirement Confidence Survey issued by the Employee Benefit Research Institute, 47% of those surveyed have less than $25,000 in savings and investments. In short, not enough Americans are afforded the convenience of an employer-sponsored retirement plan and too few Americans have the resources necessary to ensure a comfortable retirement.
These daunting statistics have put in play a number of initiatives designed to help Americans get on track financially. Today, there are efforts underway in Congress in addition to numerous state legislatures. The highlights of each of these activities follows.
Congress. As recently as July 19, Sen. Jeff Merkley, D-Ore., reintroduced his American Savings Act. Under this plan, employers who do not maintain a retirement program would automatically enroll each employee into an American Savings Account beginning at 3% of salary.
Workers would be permitted to opt out or increase their deferral to a maximum contribution of $18,000 per year. Contributions would grow tax-deferred and investment options would mirror those currently offered by the Federal Thrift Savings Plan. Employers would not be required to contribute but will be responsible for facilitating employee contributions via their payroll systems.
At the same time, Congress is considering the Retirement Security for American Workers Act. This legislation would make multiple employer pension plans (MEPPs) more accessible to private businesses. A MEPP is a plan that covers two or more unrelated businesses for income tax purposes. By pooling investments, participating businesses are able to defray expenses and eliminate some administrative requirements.
The two sticking points today that this legislation would remove are 1) the requirement that participating businesses are in a similar industry or have similar characteristic (known as the common nexus rule) and 2) noncompliance by one participating business may have adverse consequences for all other participating businesses (known as the “one bad apple” issue).
Participation in a MEPP would still be voluntary, but many proponents believe the reduced costs and fewer responsibilities than a traditional stand-alone arrangement would make MEPPs an attractive option for businesses that currently have no retirement plan in place.
States. Many states have also begun to enact legislation to address the lack of coverage and inadequate savings problems. The most popular approach has been one that requires businesses that do not offer a private sector retirement plan to automatically enroll employees into a state-run retirement savings program. The first state to launch such a program is Oregon. According to state officials, 954 businesses have employees in the program.
The second state to enact legislation, Illinois, is set to launch its pilot program later this year, with full implementation by the end of 2019. California, which already enacted similar legislation and is currently building its Secure Choice program, is facing a lawsuit brought by the Howard Jarvis Taxpayers Association. The lawsuit alleges that the state does not have legal authority to mandate a retirement savings program.
Other states have taken a different approach. For example, Washington has created a marketplace where businesses can shop for vetted, low-cost solutions. Vermont created a state-run MEPP, open to businesses in the state with fewer than 50 employees. Participation is voluntary under both these approaches.
While both Congress and these states should be applauded for their efforts to help Americans save, one must wonder who is ultimately responsible for leading these efforts. Historically, employer-sponsored retirement plans were offered at the discretion of employers and serviced predominately by private-sector financial services companies. Further, a portion of the responsibility falls on the individual, as opting out is always permitted with any of the solutions described above.
The jury is still out on the controversial Affordable Care Act, and the Labor Department’s fiduciary rule is dead. No one will argue with the merits of adequate health care coverage or putting a client’s interests first, but as with any solution to a complex problem, the devil is always in the details. Will governmental efforts tied to retirement savings be any more or less successful than these other initiatives? Only time will tell, but these events are worthy of advisor attention throughout the balance of 2018.
Matt Sommer, CFA, CFP, CPWA, is Vice President and Director of the Retirement Strategy Group at Janus Henderson Investors.