New 401(k) legislation could help small and midsize businesses offer better retirement plans. Here’s what you need to know.
New 401(k) legislation proposed late last year could open retirement plan benefits to small businesses and sole proprietorships, if an October 2018 Proposed Rulemaking change is confirmed by the US Department of Labor. To help small businesses and their employees gain easier access to retirement savings plans, the change will allow workers to participate in Association Retirement Plans, joining groups together to manage and administer funds.
In August of last year, President Trump’s Executive Order 13847, “Strengthening Retirement Security in America,” outlined the policy of the federal government to “promote programs that enhance retirement security and expand access to workplace retirement savings plans for American workers.” The administration directed the Secretary of Labor to examine policies that could clarify and expand the circumstances under which small to medium sized businesses could sponsor or participate in a multiple employer plan (MEP) to offer retirement savings options to employees.
Historically, for most small businesses and their employees, access to a 401(k) plan requires a level of administration and account management that puts them out of reach. But not being able to offer retirement security options often means losing out on top talent to larger companies that can absorb the work and fiduciary responsibility these plans require. The proposed 401(k) legislation would help small business compete with larger companies who offer retirement benefits as part of their overall compensation package.
The rule change would make five significant changes to current Department of Labor guidance. It would clarify existing requirements of groups or associations; relax the requirement the group shares a common interest if they are in a common geographic area; allow groups or associations to sponsor MEPs; allow single worker businesses to participate and, finally, develop criteria under which a PEO could sponsor an MEP.
How important is access to retirement savings?
The Employee Retirement Income Security Act (ERISA) was passed in 1975, with a focus on readying the American workforce for their financial needs in retirement. A year after ERISA was enacted, the average American had saved about $27,000.00 to these types of funds. In 2016, average savings had increased to nearly $121,000.00.
It’s estimated that over 50 million Americans today do not have access to a private retirement fund. With concern, particularly by younger workers, that Social Security benefits will not be enough to maintain a good quality of life post-career, access to retirement funds is a much sought-after benefit by employees.
But for many SMBs, cost and administration of retirement plan options can be burdensome. The new rule promises to allow business access to plans at lower costs (there’s always savings in numbers). But more than economy of scale, business could reduce or eliminate the administrative time of managing a plan, as well as fiduciary liability exposure: even plan fees could be reduced. The Department of Labor hopes the proposed rule change will “strengthen small businesses’ hand when negotiating with financial institutions and other service providers.”
Who can participate?
The proposed 401(k) legislation will allow Association Retirement Plans (ARPs) the ability to let their member companies participate in a common retirement plan. Associations can represent cities, states, multi-state areas and industry-wide groups. Under the proposal, even sole proprietorships, including their family members, would be eligible to join the plan if they are a member. Associations run the gamut – from small local groups to national organizations like the American Bar Association. The new rule would allow these groups to add access to retirement plans to their list of member options.
Multiple Employer Plans (MEPs) are retirement plans defined by IRS code. These plans, which would be allowed under the new ruling, let unaffiliated employers join a 401(k) plan sponsored by a third party or MEP. Even businesses with only a single employee would be eligible to participate. The IRS would designate MEPs as specialized employer defined-contribution retirement plans. Employers from member businesses will make pre-tax deductions from wages for deposit into a 401(k) plan through the MEP. As with all 401(k) plans, employers have the option of matching employee contributions and there are tax benefits in doing so. Every dollar a business contributes to an employee’s 401(k) plan is tax deductible. For businesses and even sole proprietorships, the tax benefit can be significant.
Many small businesses use PEOs, or professional employer organizations. A PEO can take on some of the administrative tasks small to medium-sized businesses can’t or don’t want to manage. For a fee, PEOs manage administrative functions by hiring the businesses’ employees, then “leasing” them back to the company. However, there are drawbacks to using workers who are not employed by your company; in the end, they are not your employees, it can be difficult to create an office culture, and it might not be cost-efficient in the long-term. Check out more info on PEOs. The new 401(k) legislation would allow PEOs to offer retirement plans.
The proposed ruling would expand the ability of PEOs to sponsor an MEP if they meet certain requirements. To be considered “bona fide” the PEO will need to have substantial control of the activities and functions of the MEP, assume responsibility as plan sponsor, and be the named fiduciary and plan administrator. All these are defined and administered by ERISA law.
MEPs versus PEOs for retirement plans
While a PEO can offer other benefits to SMBs, the proposed rule for MEPs will structure them for the sole purpose of offering retirement account options for associations and trade groups. This means they wouldn’t offer any other benefits.
Competitive Access for SMBs
In 2016, 85% of workers at companies with more than 100 employees had access to retirement savings plans: for businesses with less than 100 staffers, only 53% were offered access. In that same year, over 30% of Americans worked for a company with less than 100 employees. The rule change could level the playing field for SMBs when it comes to competing with their larger counterparts. It also promises to help workers plan for their financial future post-career.