Catherine Reilly is a retirement and investment professional, with particular expertise in global best practices and post-retirement solutions.
Retirement legislation is one of the few areas where there currently appears to be bipartisan consensus in the US Congress. The SECURE Act, a comprehensive package covering numerous aspects of retirement saving, recently passed the House by a vote of 417-3 and it is expected to pass the Senate this year. One of the bill’s key provisions is to allow the creation of “open” Multiple Employer Plans (MEPs).
Currently, only employers that share a common affiliation such as being in the same industry may offer a multiple employer plan. The SECURE Act would remove this requirement so that any group of employers could offer a joint plan, rather than each offering a separate plan. Potential advantages to employers of using a MEP include lower costs and reduced administrative burdens.
It is interesting that the current US requirement for each employer to offer its own plan is unusual by global standards. In most developed nations, employers commonly use plans that provide services to multiple employers, like the open MEPs envisioned in the SECURE Act. These are known as superannuation funds in Australia or master trusts in the UK.
As a result, US employers therefore bear a heavier burden for offering a retirement plan than do their global counterparts. This may be an explanation for why US retirement plan coverage is relatively low, with only about half of the civilian workforce participating in an employer-sponsored plan. Offering a plan is particularly onerous for small businesses. Only about 55% of small employers offer retirement savings plans, versus 90% of large employers.
The hope is that open multiple employer plans would induce more employers to offer retirement plans, thereby enhancing coverage among US employees. An encouraging example of a national effort to boost retirement plan coverage while shifting towards a multiple employer plan structure is offered by the UK. Retirement plan coverage among UK private sector employees has shown an impressive increase from 42% in 2012 to 85% in 2018. This also coincided with a substantial shift toward master trusts capturing the majority of new retirement flows.
Nevertheless, merely allowing open MEPS in the US is unlikely to result in greatly expanded retirement coverage. Compared to how retirement plans in Australia or the UK, the proposed legislation falls short in two significant ways.
First, under the new US legislation, employers that participate in an open MEP will continue to be responsible for retirement plan fiduciary oversight. In contrast, the Australian superannuation funds and UK master trusts have independent boards of trustees that act as fiduciaries. In Australia, superannuation funds are regulated as financial institutions and hence subject to regular stress tests. In the UK, the Pensions Regulator is currently in the process of accrediting the master trusts that are allowed to offer services to employers. In these contexts, an employer’s responsibilities are limited primarily to selecting an approved retirement plan provider and ensuring that payroll contributions are made. In the US, employers adopting open MEPS will be able to outsource some administrative tasks, yet they will continue to bear a heavier fiduciary burden than their global counterparts.
Second, offering a retirement plan will continue to be voluntary for US employers, unlike in many other countries. Australia has mandated retirement plan participation since 1992 and therefore has virtually full coverage. Since 2013, the UK has required employers to automatically enroll employees in a plan (with an opt-out employee option). The introduction of automatic enrollment was the key trigger for the growth in UK coverage rates. Moreover, master trusts have been available in the UK for two decades without capturing a significant share of the retirement market, yet once many small employers were required to start offering plans, master trusts became a natural, cost-effective solution. Initially, UK master trusts mainly captured flows from small employers, but as these grew in size, larger employers which previously offered their own plans have also started to adopt them. Interestingly, UK employers and employees generally report a positive experience regarding the introduction of mandatory automatic enrollment.
Allowing unaffiliated employers to join together in an open MEP is a significant landmark in US retirement legislation. Yet the SECURE Act alone will not close the pension coverage gap. It is therefore likely that legislators would need to require employers to offer a retirement plan, to make a real difference in retirement coverage. Some US states including Oregon and California have already taken steps in this direction with mandatory auto-enrollment IRAs. Federal legislators may wish to follow suit in the 401(k) space.
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