In his State of the Union address in January, President Barack Obama said Americans are on shaky ground when it comes to saving for retirement. Because many people don’t have a retirement plan at work, the president used his final budget to Congress to define his most aggressive plan to loosen certain rules to increase the number of 401(k) plans at companies nationwide.
The key idea would help small-business owners join with others to create a defined contribution multiple employer plan, or MEP. While the idea has been around for years, the president’s proposal would relax existing rules that have prevented small businesses from taking advantage of the strategy.
“Even as we invest in better skills and education for our workforce, we must respond to dramatic changes in our economy and our workforce,” Obama said in his budget message on Feb. 9. “To address these changes and give Americans more economic security, we need to update several key benefit structures to make sure that workers can balance work and family, save for retirement and get back on their feet if they lose a job.”
MEPs are defined contribution plans, like 401(k)s, where employees contribute pretax money into savings accounts. If it is a traditional 401(k) MEP, the money grows tax-free but gets taxed upon withdrawal. The difference with an MEP is that more than one business participates, so workers from different companies are in a shared plan.
Today, small businesses can take advantage of the MEP rule only if they join with similar but unaffiliated companies. Typically, trade associations provide MEPs for their members. Under the trade association umbrella, small companies are able to take advantage of lower costs because the MEP’s scale is larger than what they would have with a single defined contribution plan.
The president’s proposal unlocks a giant barrier, allowing any small business to join a MEP; companies would not have to be from the same industry to be eligible to participate. In addition, if the worker changes jobs, the MEP would be portable — meaning the worker’s account could move to the person’s next job.
“The president is using the existing system in a much more expansive way to draw small businesses to create plans,” said Kevin Crain, head of workplace financial solutions at Bank of America Merrill Lynch. “For years, the small employer has not had an easy path” to create a 401(k).
Under the plan, small businesses would be able to unite and take advantage of costs savings that are usually for large plans only.
“The proposal to enable employers to bring institutional approaches to their employees through participation in multiple employer plans presents a real opportunity to expand access to retirement savings plans without sacrificing adequacy,” said Lew Minsky, president and CEO of the Defined Contribution Institutional Investment Association.
In his budget message, Obama said not enough people with full- and part-time jobs have access to retirement plans at work. In 2015, 66 percent of private industry had access to retirement plans on the job, according to the U.S. Bureau of Labor Statistics report on employee benefits.
The real issue of access becomes apparent when looking at the number of small companies with retirement plans and part-time worker access. Additionally, a recent Fidelity Investments Retirement Savings Assessment study showed 55 percent of respondents risk not being adequately prepared to cover retirement expenses.
According to BLS data, only 46 percent of workers at companies with fewer than 50 people have access to plans, while 37 percent of part-time workers have retirement benefits available at work.
The president’s budget proposal included several other new and recycled ideas to increase access and usage at work, including:
- Part-time employees who work at least 500 hours a year for three consecutive years would be eligible to participate in their company’s 401(k) plan.
- A $100 million pilot program for states and nonprofits to design new retirement approaches that create portable retirement solutions and increase availability of plans at work.
- Tax breaks for small businesses to start a retirement plan or to automatically enroll workers in an existing plan.
- Long-term unemployed people to withdraw up to $50,000 a year without facing tax penalties from their retirement accounts for up to two years.
- A directive for companies with more than 10 employees to offer an automatic individual retirement accounts at work. The proposal includes a tax credit for businesses to help cover startup costs.