Now is the time. For how long have we heard that too few people have access to 401(k) plans at their place of employment?
The culprit behind this appears to be small businesses. According to the August 2016 SurePayroll Small Business Scorecard, only 28% of small businesses offer a 401(k) plan.
Add to this the fact that small businesses (those that employ less than 500 workers) account for 47.8% of the workforce, and it’s easy to see the lack of retirement plan coverage rests primarily within the small business sector.
There is a solution to this obstacle, and the House may have just cracked the door open, if just a tad, to it (see “Tax Reform Surprise: Congress Slips in 401k MEP Broadside,” FiduciaryNews.com, November 7, 2017). To appreciate why this is so, we need to examine why small businesses don’t have 401(k) plans.
Put yourself in the shoes of a small business owner. The newer the business, the more likely the owners will be more worried about surviving the next quarter than surviving in retirement.
Even well after owners achieve business sustainability, entrepreneurs continue to place a higher priority in all that entails generating revenue (from product development to marketing to sales). In fact, if they’re going to pay attention to any company-sponsored benefit, chances are it’ll be health insurance.
Face it, the expertise required to create, maintain, and monitor a company-sponsored retirement plan entails a steep learning curve.
But it gets worse. These already busy plan sponsors will have to accept the albatross of fiduciary liability dangling over their heads.
Finally, small businesses mean small retirement plans and, unfortunately, not-small fees. They simply don’t have the size to generate the economies of scale necessary to have access to lower fees.
For small businesses fortunate enough to be members of a business association, there is a work-around that overcomes these obstacles. Business associations can offer their members many forms of group benefits that can take advantage of the collective economies of scale.
Among these benefits can include the pooling of retirement benefits into one plan. This is called a 401(k) MEP, or multiple employer plan. By fully delegating the retirement benefit to the business association, the company relieves itself of much of the fiduciary liability associated with offering a 401(k) plan.
In addition, by aggregating the assets of all members, the business association should be able to negotiate more favorable fees. Finally, because the business association does all the work, this will free up time for the member company to focus on its core business, not the intricacies of ERISA, investment due diligence, and financial literacy education.
There’s only one problem with this solution. While it works, it remains only available to members of business associations, and that’s only if the business association offers a 401(k) MEP as a member benefit.
Sadly, in 2012 the DOL issued an Advisory Opinion that thwarted the effective use of 401(k) MEPs beyond business associations. But the House’s recent tax reform bill may have changed all that.
Granted, the house only nudged the door open a tad. The normal fine-tuning that follows next offers Congress a chance to fling that door wide open. Doing so would enable all small businesses to quickly and easily add retirement plan benefits for their employees.
If we’re serious about preventing some future retirement crisis, this would seem a relatively effortless and low risk strategy to undertake. Is Congress listening?