Data demonstrates that small business employees are less likely to have 401(k) plan access than their counterparts at bigger firms. It’s estimated that 42 million employees don’t have access to a 401(k) plan. Less than a third of U.S. firms with fewer than 10 employees offered workers a plan in 2012, according to research by the Social Security Administration. President Trump’s pooled Multiple Employer Plans’ order aims to broaden the possibilities for small employers to offer employees retirement plans. Will a new era of MEPs, sometimes referred to as Association Retirement Plans, will sufficiently lower costs for employers and foster an environment where employees will take charge of their own financial future? The prospects are promising. Hearings are slated to begin this week.
Alleviating Administration Costs
- More than a third of small businesses don’t have retirement plans primarily due to costs, according to research from The Pew Charitable Trust. The proposal will allow participants to be pooled from multiple unaffiliated employers, rather than asking employers to create their own independent 401(k) plan from scratch. For example, local Chamber of Commerce entities could offer a 401(k) plan that would reduce costs.
- The new guidance would also eliminate the so-called “one bad apple” rule, which disqualifies MEPs if a single participating employer fails to meet administration regulations.
- This new guidance will help in having more small businesses offer 401(k) plans to their employees to address the growing retirement shortfall in America.
How Can Advisors Add Value?
- A recent survey of plan sponsors by the National Association of Plan Advisors and The Plan Sponsor University found that 53 percent of plans are satisfied with their advisor and 55 percent are satisfied with the value they received. This intelligence indicates there is room to improve satisfaction and MEPs can help drive customer satisfaction with their advisors and value received.
- The open architecture platform for Defined Contribution is the model that MEPs will likely utilize. Providing choice in investments and lowering costs is key for recordkeeping firms and advisors penetrating the small plan market. Advisors will be key to explaining the value proposition of MEPs to small employers, which will require a significant compliance understanding of MEPs.
First Generation of 401(k), What’s Next?
- The first generation of 401(k) plan participants in the workforce are starting to retire, while many boomers continue to extend their work lives. Therefore, more assets are accumulated due to longevity, and with a possible shift of moving required minimum distributions from 70½ to a higher age, would increase the amount of assets a participant would have for retirement. The tax deferral would also help increase an individual’s assets significantly, depending upon their current investments.
MEP Predictions
The potential of broadening MEPs offers some promise in trying to solve the $7 trillion American retirement shortfall as more employees have access to retirement plans. As more employees participate, advisor involvement and improved communications will continue to be critical elements to help employees become more engaged with their overall financial wellness. Reduced administration costs will ultimately benefit the employee, employer and the advisor, giving a needed boost to the ailing American retirement system.
Tim Slavin is senior vice president for retirement solutions at Broadridge Financial Solutions.