When Kevin Boyles used to sell 401(k) plans for a living, he’d bring muted expectations into pitch meetings with small business owners.
“If the company had less than 50 employees, our closing chances were about 5 percent,” said Boyles, vice president, business development director for Millennium Trust Company.
“Eighty percent of the time the employers would do nothing, and another 15 percent of the time a competitor won the business,” he added.
That stubborn reality has beguiled retirement industry stakeholders and policy makers for decades, and left tens of millions of Americans without access to a workplace retirement savings plans. According to the Bureau of Labor Statistics, only 48 percent of businesses with fewer than 50 workers sponsor some form of a savings plan.
While the problem has been persistent, potential solutions are emerging at breakneck speed. This month the Secure Act is slated for a full floor vote in the House of Representatives, and this week the Senate Finance Committee will hold a hearing on retirement, potentially prepping a full vote on the Retirement Enhancement and Savings Act in the upper chamber.
Both bills are packed with relaxed Open Multiple Employer Plan regulations and new tax incentives designed to stimulate adoption of retirement plans among small employers.
At the state level, California’s CalSavers program, which requires small businesses to enroll workers in a state-sponsored IRA, recently survived a major hurdle when a federal judge dismissed a lawsuit alleging the plan is preempted by ERISA, the federal statute governing pensions and retirement plans. The decision is expected to be appealed.
Boyles, who heads Millennium Trust’s newly formed Workplace Savings Solutions unit, thinks the bills on the table in Congress, and seminal efforts in California and other Democratically controlled state legislatures, are commendable.
“They are all positive steps forward,” said Boyles.
But he also doubts they will solve the workplace retirement plan access gap, even if the measures were to surpass the highest expectations.
“Simplifying 401(k) administration for small employers and making plans a little less expensive won’t solve the problem,” said Boyles of the provisions Congress is considering to allow small employers to group together and pool workers under one defined contribution plan.
“Let’s say Open MEPs were to become wildly successful and triple the number of 401(k) plans that are now sponsored,” he said of the roughly 550,000 DC plans in existence today. “That would still leave about 4 million businesses with no coverage.”
The Secure Act and RESA include similar, extended tax incentives for small businesses that don’t sponsor a plan, and a new tax incentive for small employers that do sponsor a plan if they implement an automatic enrollment feature.
While welcomed concepts, their practical influence on small employers would be minimal. “Tax credits are often nebulous to small business owners,” thinks Boyles.
At the state level, plans already sponsored in California, Oregon, and Illinois may provide some regional relief to plan access in those states, but relatively few states can be expected to follow suit—“maybe five or so more in the next few years,” thinks Boyle.
It’s the cost, stupid
Last year, Millennium Trust, which partners with some of industry’s largest retirement plan providers and has $26.4 billion in assets under custody, commissioned a survey of small employers that don’t sponsor retirement plans.
Nearly nine in 10 employers said adding a plan would be attractive–but only if it added no new costs. Seven in 10 said they would add a plan within two years—but only if it added no new costs.
“The major factors for not offering a 401(k) plan were the cost to the business, and then the administrative complexity,” explained Boyles.
The Secure Act and RESA go a long way to address the administrative complexity through the Open MEPs provisions. But the bills may not ameliorate the hard costs employers bear when starting a plan, not enough to incentivize wider adoption.
“If you’re a small employer, and sponsoring a 401(k) plan was too expensive at $3,600 a year, is it really more palatable at $2,000 a year?” said Boyles.
Typically, a small employer will incur those start-up administrative costs for the first two to three years of a 401(k) plan’s existence, before the assets can be aggregated in plan to cover them, explained Boyles.
In the past several years, online 401(k) providers have cropped up, offering reduced start-up cost solutions, typically around $1,500.
That their success hasn’t been torrid suggests to Boyles that even $1,000 in start-up costs may be too expensive for small employers that don’t sponsor plans.
“Every major recordkeeper in the country is trying to understand which employers have considered sponsoring a plan but haven’t—they’re trying to understand their cost tolerance,” said Boyles.
Millennium Trust’s new Workplace Savings Solution platform takes existing alternatives to 401(k) plans—SIMPLE 401(k), SEP IRAs, and payroll deduction IRAs—and charges a one-time nominal fee–$250—for setting up a plan.
Under a SIMPLE 401(k), small employers would of course incur the cost of required matching contributions. Payroll service providers may charge a fee for administering deductions. Millennium Trust would draw revenue as custodian of the plans, said Boyles.
Whatever the fate of Open MEPs and state-administered IRAs, the need for existing alternatives to standard 401(k)s will continue, thinks Boyles. Were Congress to pass a retirement bill—it will have to happen sooner rather than later before the initiative is bogged down in the run-up to the 2020 election, he said—and state initiatives meet their proponents’ expectations, millions across the country would still be without a retirement plan in the foreseeable future.
“Best case scenario would be doubling the access we see today—though that is strictly my opinion,” said Boyles.
The problem with the approaches Congress is considering to close the access gap, as he sees it, is a failure to address the blunt reasons behind small employers’ reluctance to sponsor plans—the cost of starting a plan.
“No one is diagnosing the employer situation,” said Boyles.” We’re trying to address the problem of cost with solutions we already have.”