Under Covered

In the four decades since ERISA was passed into law, millions of Americans have entered and retired from the workforce. Plan designs of many shapes and sizes have come into being. Defined benefit plans dominated, then faded, after 401(k)s sprung out of an obscure section of the Internal Revenue Code to become the way America saves.

But despite all the change and innovation — the advent of target-date funds, automatic enrollment, demographic shifts and workforce composition changes — through good economic times and bad, one thing hasn’t changed: the percentage of American workers covered by a workplace retirement plan.

Incredible as it may be, despite improvement in nearly every retirement plan metric — more and higher levels of participation, more diverse and, thanks to asset allocation strategies and advisor interventions, better rebalancing of investment portfolios, as well as the lift provided by sustained bull markets — the retirement preparations of nearly 4 out of 10 American workers in the private sector have been left sitting on the sidelines simply because they don’t have access to a retirement savings plan at work.

It’s been an issue for a long time, but the tax reform debate has brought a whole new focus to the issue. Increasing access to coverage in a retirement savings plan is, without question, the next big policy issue for our industry.

This coverage gap was, in fact, the rationale underlying the proliferation of proposals at the state level to expand retirement plan coverage in the private sector. Some, like California and Oregon, have a mandate with a government-run default; others are looking into creating a 401(k) MEP for employers in their state; and still others have created a marketplace for small businesses to find a plan provider or are working on one. And while it’s early in the implementation, we can already see that it’s a mess for employers, advisors, and participants alike.

Proponents talk about the possibilities that could emerge from 50 state “laboratories” creating different solutions. What they never seem to remember is that Dr. Frankenstein also had a laboratory — and how did that turn out?

Solutions are emerging on a federal level. Rep. Richard Neal (D-Mass.), the ranking Democrat on the House Ways & Means Committee, has introduced a game-changing national retirement plan coverage proposal called the Automatic Retirement Plan Act (ARPA). Under Neal’s bill:
 

• All employers that have more than 10 employees and have been in business for at least three years would be required to provide an automatic enrollment 401(k) plan.
• After a 5-year transition period, all employees over age 21, including part-time workers, would have to be covered after no more than 3 months of service (plans would no longer be subject to the current 70% coverage rule).
• Auto-enrollment would start at 6%, with annual auto-escalation of 1% up to 10%.

The bill would allow for open multiple employer plans (MEPs), which under certain circumstances, would relieve small employers (up to 100 employees) of all fiduciary and administrative duties (other than passing on contribution amounts and conveying needed information, such as employee lists and payroll data), and would provide relief from the one-bad-apple rule applicable to MEPs.

Plan accounts would be portable, but 50% of the account balance would have to be distributed in the form of a lifetime income vehicle.

And while no employer contributions would be required in the minimum plan, which would be a safe harbor plan with no testing, the bill would also change ERISA’s coverage rules — not just for the minimum plan, but for all existing plans.

What would that mean for workplace retirement plans? For retirement savings? We’re in active conversations with Rep. Neal regarding the proposal.

The bottom line is there are those who will, as they always do, fault the private system. But the 401(k) isn’t the problem — it’s that there are too many working Americans without one. The reality is that when even moderate-income workers do have access to a 401(k) plan, they are 12 times more likely to save for retirement than they would be on their own in an IRA.

The challenge — our challenge — is to expand the availability of retirement savings in the private workforce.