The single most important move Congress could make to support retirement for Americans
While there are many thorny questions facing the divided legislature in Washington, D.C., there is one issue that enjoys broad bipartisan support: saving for retirement. Promising bills, sponsored by members of both parties, would make offering a retirement plan easier, more effective, and less expensive, especially for small businesses.
Here’s a snapshot at some of the proposals in play:
- an expanded tax credit to encourage small businesses to offer plans
- new, simpler plans in the market that reduce regulations for employers
- incentives to boost savings, ultimately increasing the value of the benefit small businesses offer
- a requirement that firms with more than 10 employees offer a simplified 401(k), with optional employer contributions
Currently, small businesses in America struggle to offer retirement plans for their employees. Only about 53 percent of people working at small companies had access to a retirement plan as of March 2018, according to the Bureau of Labor Statistics.
Why the dramatic gap? Traditional retirement plans have been costly, and choosing the right one is not a simple decision. Many small and mid-size companies don’t have the resources to figure out which funds to offer or which fund company is best for them. Sometimes, they don’t have the resources to offer a plan.
Many of the proposals that will be debated this year in Washington would fuel this kind of innovation, opening the door for millions of Americans to start saving for retirement. Here are three of the most promising:
A Powerful, Targeted Tax Credit for Employers
There are several bills that have been introduced that would dramatically increase the tax break that employers get for starting a retirement plan; the number is a sign of widespread support. In the last session, the Senate Finance Committee unanimously approved the Retirement Enhancement & Savings Act (RESA), demonstrating its strong bipartisan backing. In addition, Sens. Ben Cardin (D-MD) and Rob Portman (R-OH) introduced the Retirement Security & Savings Act, and incoming Chairman of the House Ways and Means Committee Richard Neal (D-MA) introduced the Automatic Retirement Plan Act and reportedly will make it a priority in the new Congress. All three bills would expand the tax credit for small businesses from $500 annually to as much as $5,000 annually for the first 3 years, to help offset setup and administrative costs for new plans.
We believe this is the single most important step Congress could take to help small and mid-sized businesses (SMBs) and their employees start building a nest egg. Widely cited research from the Pew Charitable Trusts finds that high costs present the largest barrier for small businesses in offering a 401(k) plan. Other important barriers include a lack of internal resources to administer a 401(k) plan and complexity stemming from the heavily regulated nature of employer sponsored plans. Increasing the tax credit by a factor of 10 would directly target the biggest obstacle facing many companies, and could have a major impact on reducing the SMB access gap.
The most far-reaching approach to increase access, outlined in Chairman Neal’s Automatic Retirement Plan Act, would require firms with more than 10 employees to offer an automatic contribution retirement plan (small businesses that already offer a plan would not be affected). Prospects for such far-reaching change are uncertain--at best--in the current climate, but a new requirement would represent the most important change since the current system was established in 1974 with the passage of the Employee Retirement Income Security Act, known as ERISA.
The approach is similar to efforts under way in several states, including California, Illinois, Maryland and Oregon, with one critical difference: While new state plans create automatic IRAs, this legislation would establish full 401(k) plans, with higher savings limits and optional employer contributions. In addition, the Automatic Retirement Plan Act features a variety of automatic features to simplify investment options, contribution levels, and administrative burdens.
Making Retirement Plans Simpler
A second major challenge faced by small and mid-sized firms is complexity. Choosing the best provider, understanding and making the most of key plan features, and taking on fiduciary responsibility to act solely in the interest of the plan’s beneficiaries are not simple matters. The three bills noted above, among others, offer several ways to reduce the burdens faced by small and medium-sized businesses.
One proposal would make it easier for firms to join together in single retirement plans. Known as Open Multiple Employer Plans, or MEPs, such plans enable businesses to band together to offer low-cost investments and common record-keeping and administration. Several proposals in Congress, and a proposed rule from the Department of Labor, would authorize Open MEPs, an important step forward.
We believe, as does Mark Iwry, formerly a senior adviser to the Treasury secretary in the Obama administration, that the marketplace has already achieved much of the benefit of multi-employer plan legislation. Guideline itself is an example of this: We offer a low-cost investment lineup and recordkeeping integrated with payroll, essentially offering small businesses many of the same economies of scale that multiple employer plans do.
But, we believe that well-designed regulation or legislation could help even more, especially if regulators and legislators design MEPs so that small businesses can access the lowest-cost, institutional class funds as investments in their retirement plans.
Even when small businesses offer retirement plans, people often don’t save enough. According to the latest survey from the Center for Retirement Research, half of American households are at risk of not being able to afford a secure retirement.
There is broad consensus among retirement experts in industry and academia that the three percent voluntary default savings rates for employees in Safe Harbor plans set by previous legislation is too low (many people see the default as a target instead of a starting point). Both the Automatic Retirement Plan Act and Retirement Security & Savings Act would boost defaults to 6 percent, and then gradually raise them to 10 percent over several years, a significant increase in savings rates that would boost retirement income.
In addition, these two bills would expand the current Savers Credit, which would increase incentives for individuals, especially low and middle income workers. Both proposals, if they become law, would go a long way toward improving the value of retirement plans, for employees and employers who offer them. At Guideline, our millennial savers, on average, put aside 7.7% or more annually.
A Rare Opportunity for a Bipartisan Win
Guideline has signed up 10k+ small and mid-sized businesses, with 80% of them starting a new plan for the first time. In our experience, small businesses are eager to offer high-quality plans that build security for the people who work for them.
Retirement security may be one of the few bridges across the partisan divide in the national capital this year. We have heard people from both parties describe their interest in improving the U.S. retirement system; we saw evidence of that as the bills mentioned above were introduced. Over Labor Day weekend last year, President Donald Trump signed an executive order to spur multiple employer plans along, simplify disclosures, and give people more flexibility to leave money in plans after they’re retired instead of taking required minimum distributions.
Don’t let the public rancor fool you. This is a rare moment in time when innovations in the market are being matched by quiet willingness in Washington. Let’s hope Congress seizes it.
This post was co-authored by Jeremy Smith, former associate director of Financial Security Program, The Aspen Institute, and co-founder of MacIvor Strategy Group, a Washington, D.C.-based research firm.