Can Obama help fix America's retirement crisis?
The budget President Obama submitted to Congress Tuesday night included a proposal to increase the number of Americans eligible for work-based retirement plans by expanding the use of so-called multiple employer plans (MEPs). This strategy would help address a significant shortfall in the country's retirement system: Roughly half of all American workers aren't covered by a work-based retirement plan.
The most vulnerable are employees of small businesses and part-time and low-income workers. This lack of coverage has led to a growing disparity between the retirement haves and have nots.
Retirement plans at work offer significant advantages to workers -- auto-enrollment, automatic saving through payroll deduction, institutional pricing and doing the shopping for potentially complex retirement investment products. A retirement plan at work significantly increases the chances that workers will save money for retirement. Fewer than 10 percent of those without a workplace retirement plan contribute on their own to a retirement account, such as an IRA.
The trouble is, many small businesses don't have the resources to design and implement retirement plans on their own, and they don't have the group buying power to shop for low-cost plans. That's where expanding MEPs can help.
MEPs allow for unrelated employers to be grouped together for group buying power to reduce per capita costs for investment and administrative services. They're currently allowed for employers who have a common bond. The most prevalent use now is to cover employees who are members of the same union but work for different employers.
These plans have successfully enhanced the retirement security of union workers for decades. The goal with "open MEPs" is to build on both this retirement infrastructure and the advances made by 401(k) plans to expand retirement plan coverage to all types of workers.
An open MEP would remove the common-bond requirement and let small businesses of all types allow their workers to participate in a MEP. Coverage would be portable, so if employees change jobs, their retirement plan goes with them. Contractors and other part-time workers could also join a MEP.
A small business would still need to select a MEP for its employees and arrange for the payroll system to forward employee contributions to it. The MEP would take over from there by investing workers' contributions and being responsible for accounting and compliance.
Any business participating in a MEP wouldn't need to worry about the plan being disallowed because of the actions of other participating employers.
Small businesses that participate in MEPs can realize the same advantages that large employers gain by sponsoring stand-alone 401(k) plans, thus improving productivity by reducing the financial stress of their employees and addressing a crucial societal need.
Obama's proposals would also expand retirement plan coverage of part-time employees by requiring employers to cover workers who had completed 500 or more hours for each of three years.
Various retirement industry experts and the financial services industry applaud open MEPs. "Open MEPs will encourage private sector financial institutions to work hand in hand with small employers to help expand retirement savings coverage," said Kevin Crain, head of Workplace Financial Solutions at Bank of America Merrill Lynch.
Congress has also expressed interest in open MEPs, so perhaps Obama's MEP proposals will receive bi-partisan support. Of course, details must be worked out, such as reporting requirements, and it's up to Congress to move the proposal forward by filling in these details. If adopted, MEPs have the potential to help millions of Americans improve their retirement security.
