This will be an important year for efforts to get more American workers covered by workplace retirement plans, especially those who work for small employers.
Several big states will roll out programs that automatically sign up workers for individual retirement accounts if they don’t have workplace 401(k) plans. And multiple-employer plans may finally get their day in the sun if the Retirement Enhancement and Savings Act (RESA) becomes law. It would make it easier for small employers to offer 401(k)s to workers by joining "open MEPS" (multiple-employer plans).
The state auto-IRA initiatives should put downward pressure on the price of retirement plan services, especially in large states like California and Illinois. Effectively, these are “public option” plans targeting the small-employer market and workers who have not yet saved much—if anything—for retirement. Open MEPs may open up new opportunities for advisors, but much will depend on whether large plan providers see this market as worth their time, expense and effort.
Here’s what we do know: focusing on workplace saving makes sense, because it’s the most effective spot for getting people to save for retirement. Yet one-third of private-sector workers had no access to an employer-sponsored retirement plan in 2016, according to the United States Government Accountability Office. The coverage shortfall is greatest among low-income workers and people working for small companies.
Last year, the Pew Charitable Trusts surveyed more than 1,600 small- and medium-sized business owners about the barriers they face offering retirement plans; most often they cited expense, limited administrative resources and lack of employee interest as the top reasons for not offering one.
State plans and RESA both were on the agenda this week at two congressional hearings on retirement security—a sign that lawmakers are focused on the issue. Reps. Ron Kind (D-Wis.) and Mike Kelly (R-Pa.) reintroduced the RESA bill in the House on Wednesday, while the House Ways and Means Committee heard testimony not just on saving but also on Social Security expansion and the looming multiemployer pension insolvency crisis; the Senate Special Committee on Aging held a hearing focused on improving workplace coverage.
Here’s a look at both ideas, with an eye toward their impact on advisors.
States have been gearing up their auto-IRA programs for several years. While they are not retirement plans in the traditional sense, they have the potential to impact the small-business market by putting downward pressure on fees.
Oregon started its plan in 2018, and California and Illinois will start this year. Vermont, Maryland, Virginia and Connecticut are preparing to begin programs. New York has passed legislation and is establishing a board to oversee the start of a state program over the next two years. New Jersey also is considering a plan.
The states that have approved plans could eventually extend coverage to 15 million workers, AARP estimates; California's plan alone could cover 7.5 million workers.
Auto-IRAs are not governed under the Employee Retirement Income Security Act (ERISA); they really are payroll deduction plans that funnel dollars into state-sponsored, third-party-run IRA programs.
The two key features: First, these plans are mandatory in many of the states, with a gradual phase-in. Second, they aim to bring costs down significantly compared with the prices often charged in the small-plan market. Most are launching with fees in the range of 80 to 100 basis points but aim to bring their fees down significantly as they scale up and get past their initial start-up costs. Still, that is far less than the fees charged by many small-business plans, which often exceed 200 basis points.
If enough states enact auto-IRA programs, pressure could build to roll all these disparate state plans into a single national program. That would bring us back to the future; the Obama administration proposed a national auto-IRA as early as 2010. The state plans were hatched only after that proposal failed.
Advocates for the state plans have a powerful ally in the new chair of the House Ways and Means Committee, Richard Neal (D-Mass.). Neal is the author of the Automatic Retirement Plan Act of 2017, which would require most employers to offer qualified defined-contribution plans to workers.
“Neal has been a proponent of auto-IRAs for more than decade,” notes Andrew Remo, director of legislative affairs at American Retirement Association. “Since these would be ERISA plans, they would be auto-IRAs on steroids.”
Open MEPs are the key component of RESA, which also includes provisions to make it easier for employers to include annuities in workplace retirement plans within their fiduciary responsibilities. Versions of RESA have been bouncing around Congress for years, and it has gathered strong bipartisan support; many policy experts expect that a final version will become law this year.
Open MEPs aim to make it easier for employers to band together to join a single 401(k) plan that they can offer to employees. They would be offered by private-plan custodians; the idea is to entice employers with low costs and streamlined paperwork.
But it’s not clear how many plan providers will jump into this market.
“Financial services companies are not sure what to make of it,” Remo says. “There is a lot of uncertainty as to how it will impact the marketplace and the amount of resources firms are willing to spend to capture small employers.”
And more-competitive low-cost options for small employers have surfaced since the open MEP idea was hatched. Vanguard launched its Retirement Plan Access platform in 2011, a low-cost program for plans with up to $20 million in assets. Through year-end 2018, it served more than 11,000 plans and more than 490,000 participants, a spokesperson says. (Vanguard has no intentions to enter the open MEP market, the spokesperson says.)
The early movers in open MEP plans are likely companies with experience running the current variety of MEPs, which are offered along more-limited vertical lines.
For example, Pentegra has its roots in MEPs. Pentegra was created by the Federal Home Loan Bank System to manage a defined-benefit pension plan for system employees. The company later created a multiple-employer defined-contribution savings plan for its clients. Membership in both plans was subsequently expanded to savings and loans, thrift and savings banks, and eventually any financial institution, including commercial banks and credit unions, along with the organizations serving them.
Pentegra will be in the open MEP market, says Pete Swisher, the company’s senior vice president and national sales director. “But it is part of a larger conversation about how we expand coverage,” he says. That broader conversation, he says, must include payroll deduction programs like the auto-IRA and “some sort” of a mandate for employer participation.
The big challenges facing open MEPs, he adds, are the money, time and effort required of employers and plan providers. “The math needs to be right for this to be worth it,” he says.
Whether open MEPs bring down the cost of participation will be interesting to watch. Costs for employers likely will be defrayed by a generous startup tax credit; recent versions of RESA that have circulated increase the credit from $500 to as much as $5,000.
The size of open MEPs will play a big role in determining all-in expenses for participants, and so will the level of administrative and other support that’s required of providers, notes Deb Rubin, vice president and managing director of TPA and specialty markets retirement at Transamerica.
“A $1 million plan alone is a $1 million plan, but a $1 million plan as a participant in a $50 million MEP is part of a $50 million plan,” she says.
Transamerica has been a recordkeeper in the MEP market for 20 years and has the product infrastructure in place to offer open MEPs. The company plans to “almost immediately,” she says.
The $5,000 tax credit will provide advisors who focus on the small-business market an opportunity to pitch new business, Remo thinks. “You can go door to door as a plan advisor and say to an employer, ‘Hey, I can put you into a free 401(k) in terms of startup costs.’”
Pentegra’s Swisher hopes that open MEPs will make it easier for generalist financial advisors to work with small employers on their plan options. “Not just open MEPs, but SIMPLE IRAs, payroll deduction IRAs and the like,” he says. “There are plenty of options, and it can be difficult for an advisor to master all the technical details.”
Transamerica will be working with third-party advisors to sell MEPs. Rubin thinks the prepackaged nature of open MEPs will help advisors scale their business. “It will help advisors who participate in the retirement plan market but also those who come across it only once in a blue moon—it will make finding a solution easier.”