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Why We Need Freedom in Retirement Savings Plans

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Tags Bureaucracy and Regulation

09/22/2018

On August 31, President Donald J. Trump signed the Executive Order on Strengthening Retirement Security in America, a preliminary step in allowing seniors more economic freedom and security in retirement. At present, there are many constrictive regulations in place preventing Americans from saving as much money as they otherwise would. In fact, 33% of Americans have no money saved for retirement, 28% of which are over 55, according to a 2015 survey. As the coffers of Social Security continue to drain, saving for retirement has become ever more important.

However, a large amount of small-business workers have no access to workplace retirement plans. For instance, a whopping 43% of businesses employing fewer than 100 workers do not offer 401(k) plans, despite the benefits that it would provide to both employers and employees. After all, businesses that offer retirement plans, ceteris paribus, are more appealing to prospective workers than those that do not. By consequence, if more small businesses offered 401(k)s, they would have more bargaining power against other companies in hiring the most capable employees. Ultimately, it would enable them to compete against large businesses with greater ease, allowing them to serve consumers more effectively and realize greater profits.

In addition to helping small businesses thrive, many small-business workers themselves would also benefit if 401(k)s were offered more readily. As the AARP Public Policy Institute points out, “[w]orkers are 15 times more likely to save for retirement if they have access to a payroll deduction savings plan at work” than if they have to set up an IRA themselves. Since this is the case, the increased availability of 401(k) plans would significantly benefit many workers in the long run by allowing them to save money with less of a hassle. Of all workers, low-wage earners would be benefited most intensely, since they are the least likely to be offered retirement plans by employers. Their low incomes, on top of that, make it even more difficult to devote time and money to setting up IRAs; for that reason, they are far less likely to save for retirement. If these impoverished individuals were given the opportunity to access 401(k)s, they may have much more money saved by the time they retire, even if they are unable to invest as much as wealthier people.

As in all instances of increasing consumer choice, offering 401(k) plans is advantageous for all parties involved — businesses become more attractive to potential employees, and employees, especially those that are very poor, would be able to save more for retirement. Despite the benefits of doing so, though, many small businesses are unable to offer 401(k)s. Nearly three-quarters of small-business owners cite the costliness of setting up 401(k) plans as having discouraged them from offering plans to employees. There is, interestingly, a direct correlation between the size of businesses and the amount of businesses offering 401(k)s, reflecting the fact that many smaller businesses are simply unable to offer them. Companies with smaller pools of capital are less able to cope with the costs of setting up 401(k) accounts, and are simply not as equipped to negotiate low plan fees as are those with more capital. The economies of scale in place make it easier for larger businesses to devote resources to offering 401(k)s, helping them to provide a more secure experience for their employees.

President Trump’s executive order proposes that access to multiple employer plans (MEPs) be expanded, making it easier for small businesses to pool their capital together into jointly creating shared 401(k) plans. This way, “they can have the same purchasing power or even more, frankly, as large businesses”, as Trump explained in Charlotte, NC. As it is now, federal law does recognize MEPs, but the stringent regulations imposed on them make it difficult for them to form and operate. For example , due to harsh requirements in § 413(C) of the Internal Revenue Code (IRC), if a single employer in an MEP does not comply with certain rules and regulations (such as the prohibition on workplace discrimination), the entire plan could lose its tax-qualified status. Since the deferring of tax payments on account investments is one of the most significant attractions of the 401(k) plan, this present wording and interpretation of § 413(C) imposes great risks on employers associating in an MEP. Trump’s executive order could possibly lead to legislators fixing this regulatory burden by amending tax law to punish only employers who violate IRC requirements. As a result, there would be less of a risk imposed on small-business owners, making them more inclined to contract with other employers to form an MEP.

Other problems also exist with current MEP guidelines, especially as they relate to the Employee Retirement Income Security Act (ERISA). Plan sponsors, according to ERISA § 404(c) , fully assume the responsibility to run MEPs for the sole benefit of plan participants and beneficiaries, and are thus fully liable for any monetary losses to the plan or misuses of its assets. Employers are similarly required to “exercise control over the [MEP] program, both in form and substance”, due to ERISA § 3(5) . These regulations inhibit the specialization of administrative responsibilities by preventing sponsors from contracting with more capable individuals who could be delegated specific tasks that they would be more efficient at performing. More impactfully, it deters would-be sponsors from sponsoring MEPs at all, leaving the economy with fewer MEPs and thus fewer 401(k) plans offered to workers. To deal with these regulatory issues, potential legislation could make it legal to divide fiduciary responsibilities and allow only the most adept authorities to deal with them. These authorities would collect pay for helping to run the MEPs and would themselves assume any liabilities associated with their activities.

Such desirable legislation, however, would only be useful insofar as sponsors are allowed to exist. Potential plan sponsors must meet a rigid set of requirements before even being able to become sponsors. According to the legal interpretation of ERISA § 3(5), “the group or association” looking to sponsor an MEP must be a “bona fide organization with business/organizational purposes and functions unrelated to the provision of benefits”. Requiring that preexisting firms sponsor plans as such prevents new firms from being formed for the sole purpose of sponsoring plans, resultantly hindering specialization and efficiency in plan sponsorship. Furthermore, employers participating in an MEP are required to “share some commonality and genuine organizational relationship unrelated to the provision of benefits”. This arbitrarily restricts dissimilar businesses from forming financially advantageous plans simply because they share few business ties or belong to different industries. As such, many businesses are legally prohibited from forming plans with one another, preventing some of the most efficient business ties from emerging. Ultimately, this makes MEPs far less resilient and more prone to failure than they otherwise could be.

Federal law makes it very difficult to offer MEPs, causing there to be far fewer small businesses offering 401(k)s and far less money saved for retirement by American citizens. For this reason, Trump’s executive order directs the Secretary of Labor to “examine policies that would … clarify and expand the circumstances under which United States employers, especially small and mid-sized businesses, may sponsor or adopt a MEP as a workplace retirement option for their employees”. While this may not lead to all small businesses offering retirement plans, it would lead to many more being able to, increasing their own attractiveness to potential workers, and securing far more workers during retirement.

James Ketler is a 15-year-old student.

Note: The views expressed on Mises.org are not necessarily those of the Mises Institute.
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