Last week, the White House unveiled its annual budget proposal. Although the budget contained a repeat of similar items relating to retirement plans that had been included in previous years, much of the press reported as if this items were new. According to many experienced professionals, this perhaps misplaced adulation, however, appears to have missed the greater point – the vast bulk of these proposed “solutions” either ignore the current reality of the retirement plan landscape or, worse, are trying to solve the wrong problem.
Let’s begin with the stated premise of the White House proposal. Citing a statistic that says a third of all Americans don’t have access to a company sponsored retirement plan, Jeffrey Zients, director of the President’s National Economic Council told reporters “We need to find new ways to help families build up a nest egg.” Some advisers do agree with this assessment. “The issue isn’t availability in the marketplace,” says Kate Crowther, Director of Government Relations at Ubiquity Retirement + Savings in San Francisco, California, “the issue is availability in the workplace. Similar to health insurance, retirement savings has traditionally been linked to employment. Without retirement savings access within the workplace, employees are not likely to enroll in a plan on their own.”
The reasons for this perceived lack of availability may have its roots in the very government that’s offering to “solve” the problem. “The IRS and the DOL make it too expensive for companies to sponsor plans,” says Harley L. Bjelland, an ERISA attorney located in Orange, California. “The rules are overly complex and the audit practices of both agencies is to make money off mistakes that are the fault of service providers and not the plan sponsor.”
Some, however, feel the issue lies solely in the lap of employers, and the lack of workplace plans can be overcome by a government mandate. Pete Swisher, Senior Vice President and National Sales Director for Pentegra Retirement Services, headquartered in White Plains, New York, says, “Availability is absolutely not the issue. The issue is distribution and uptake. There is a need for distribution in that, no matter how simple or cheap you might make retirement plans, employers will always want and need help and will turn to advisors for that help; therefore you need to coopt advisors to distribute solutions. But will employers actually act? The answer will remain, ‘No’ in a large percentage of cases absent a legal mandate; thus, the potential good that can come from the state and federal proposals being discussed. A mandate coupled with private sector distribution and competition is the formula.”
In reality, though, there are plenty of options for companies when it comes to offering retirement plans. When confronted with the “lack of availability” argument, those in the field have a blunt rebuttal. “That is absolutely false,” says Tom Zgainer, Founder and Chief Executive Officer at America’s Best 401K in Scottsdale, Arizona. “401k providers are like a Subway sandwich shop, they are everywhere. Why that perception is out there, is that not all people that help small businesses know about 401k plans and/or they can only get paid a certain way so they can only provide certain options. Given the number of options available (SIMPLE, SEP, 401k, 403b, etc.), there is no shortage of plans for any size employer.”
Moreover, company sponsored retirement plans are only one of the options available to workers. The contributory IRA plan has been around longer than the 401k plan and, as we’ve seen with “Romney-sized” IRAs, they can accumulate a dramatically large amount of savings. “The options in a post-pension world have been well-defined for decades,” says Victor J. Medina, founder of the Medina Law Group and Private Client Capital Group in Pennington, New Jersey. “The problem isn’t with the options, but in people’s behavior in participating in them. Whether it’s a company-sponsored program like a 401k or a self-directed traditional IRA, investors haven’t developed disciplined saving habits, which leads to poor levels of participation, and often ‘late’ participation jeopardizing a successful retirement.”
And therein we find the nut of the issue – the real problem that needs solving. “There are plenty of retirement account options for workers,” says Matthew Haywood, Retirement Plan Advisor with Krilogy Financial in St. Louis, Missouri. “However, the worker is responsible for enrolling in or opening a retirement account. The availability is there and the costs can be very low, but it is the worker’s responsibility to save.”
So, why don’t people invest in their retirement? Zgainer says, “From the employee side, it is based on demographics. Many people are living from paycheck to paycheck and that makes it seem hard. The lack of financial literacy in America makes it hard for people to understand what they need to do and much of the terminology used by retirement plans and vendors. If for example, the government enacted a new 5% tax on all Americans, we would complain, moan, wring our hands about government, but we would pay it. Thus, the proliferation of auto-enrollment and auto-escalation options is taking hold. We should make it very hard to opt out versus opting in.”
Crowther cites many reasons for employee’s failure to save, including, “a lack of financial education/literacy regarding plans and investments; feeling overwhelmed by the choices provided within the marketplace; the concern that you aren’t making the right choice; and, a struggle to find the best product and cost to suit your needs. Even among employees with access to workplace retirement savings, participation is not 100%. There are certain economic/behavioral explanations for this: stagnant wages make people protective of every paycheck; the assumption of social security providing adequate retirement income; and, a spouse contributing to retirement savings within their own workplace to satisfy required retirement income.”
In a similar vein, Medina offers three reasons why people don’t participate in retirement plans. He says, “The first is that it’s really hard to save first, and spend second. Spending feels good now, and saving… doesn’t feel like anything. The second reason is that most investors are overwhelmed with the number of choices they have, which leads to analysis paralysis and they don’t do anything. Finally, investing brings in emotional and people can make some terrible decisions because of emotion. Investing should be the emotional equivalent of watching grass grow or paint dry. However, normal volatility in the market can cause investors to react in a poor way and cut the legs out from their plan by being late to getting in and out of the market. Financial advisers have a valuable role to play in solving both the discipline problem and investment education problems.”
Haywood blames it on a lack of financial education and inaction on the participant’s behalf. He says, “Many participants in 401k plans receive little to no education on the benefits of saving into a retirement plan when they become eligible. If they don’t understand it, they will be hesitant to participate. That initial hesitation could lead to months or years of not contributing.”
Sometimes employers can successfully address the issue of financial literacy. “When plan sponsors spend money to educate their employees about the needs and cost of retirement planning, the employee participation rate is much higher,” says Bjelland. There is a caveat, though: “It is so expensive for employers to educate their employees and many third party administrators do not have the capability to educate employees.”
It is this perception of cost that can dissuade employers from presenting the full banquet when it comes to retirement plans. But this perception does not hold up in the marketplace. “If you are smaller,” says Zgainer, “you can have a plan with best of breed options for as little at $1,600 a year that is a tax deductible expense, plus the $500 tax credit for 3 years.” Zgainer says, “If cost is one thing, compliance is another. “The other issue for employers it the perceived complexity of the rules (some truth here around small plans and some of the testing but you can resolve via Safe Harbor) and the fear around fiduciary obligations. Today, vendors and advisors can resolve these very easily for employers.”
Yet the idea that we have a problem due to lack of availability persists, and when the inevitable government-sponsored solution rears its ugly head, battle-hardened troop shiver with disbelief. They can’t imagine the government doing any better sponsoring private retirement plans than it does managing public retirement plans. To prove their case, they need point no further than existing government sponsored plans. Dave Arey, a retired adviser with 37 years of experience and formerly of Stevens Point, Wisconsin, says, “What ‘level’ is our retirement system at currently? I would say the current level is pathetic at best. Social Security has mismanaged by Congress ever since the Greenspan Commission in 1984, (e.g. where will the money come from to redeem the bonds held in the Social Security trust fund? And in the not too distant future payroll taxes will cover about 75% of promised benefits).”
It is possible to find a financial provider who supports the idea of government entering the private retirement plan market. “State-sponsored plans, if the structure is a public-private partnership to include a mandate (Secure Choice model), will compel employers to provide access to workplace savings to their employees,” says Crowther. “At minimum, employees will be automatically enrolled in an IRA savings account through a simple payroll deduction facilitated by the employer. The role of the employer is limited to posting information related to the program, creating the deduction from the employee’s paycheck and remitting the funds to the appropriate plan. The employer is not responsible for the selection of the plan, fees, or management of the plan. The best case scenario is that an employer will seek out a 401k or SIMPLE IRA plan in the marketplace that will provide the maximum benefit to their employees due to more diverse investment options. The mandate is for the employer to provide workplace savings, the mandate is not to participate in the state-sponsored program. An employer offering workplace savings is exempt from participating in the state-sponsored program and is not subject to penalty for non-compliance.”
But not everyone agrees government intervention will make things easier, especially for the business owner. “I believe the biggest disadvantage would be for the business owner,” says Haywood. “The business owner would be responsible for many administrative duties to implement these plans. They would be responsible for making changes to payroll, monitoring eligibility, and many other duties which can be time consuming.”
Not on does Medina not see any advantage in state-sponsored retirement plans, he fears they may make the same “choice overload” mistakes private retirement plan sponsors have only recently begun to correct. He says, “Any large, group retirement plan is going to require making some choices on which investments to include and exclude. While some plan is better than no plan, there’s chance that a state-sponsored plan will be able to include the infinite choices necessary to customize a retirement plan for everyone in that state. And then there’s the ironic twist to creating a plan with many choices, which is that studies show that that more choices a plan contains, the lower the participation rate.”
Ironically, government involvement may also swing the pendulum too far the other way. Zgainer, who sees no advantage to government getting involved in the private retirement plan market, says, “Limits are lower, investment options are fixed with very little upside, complex rules around having to move dollars once you have achieved a certain account balance. There is nothing that a state run plan offers that can’t be done more efficiently and effectively by the private sector. The employer may not be getting the right advice or guidance by their trusted advisors or vendors so they may think they do not have better options.”
And, when it comes to efficiency, Bjelland fears, “the government will waste 40% of the cost on bureaucracy and will make something that the private sector will do for $1 cost $10. Take one look at government sponsored plans. They are defined benefit plans and they are so grossly underfunded that it will ultimately lead to the bankruptcy of this country.”
Finally, government involvement can be very stultifying. “Lack of innovation and efficiency that gets worse over time,” says Swisher. “Imagine if we had frozen the retirement plan world in the hands of government back when defined benefit was the only type of plan; the advances of the past forty years would never have existed and time would have been frozen. Government tends to stifle the creative process because it fixes things in place by law, private interests take root, and it becomes very difficult to change anything, even for the better.”
Going back to the real issue, Haywood says, “I see little advantage to state-sponsored retirement plans. There are many options for workers to save for retirement. In the current environment, the worker has to be responsible to save whether in a company-sponsored retirement account or in an individual retirement account. By adding a state-sponsored option, the responsibility of the worker doesn’t change.”
But the government can do something and, despite what might have been implied otherwise in the slew of media reports following the president’s budget proposal, members of the government are already trying to address the real issues. Rather than creating state-sponsored retirement plan “pools,” there’s an existing vehicle within the current code that does the same thing more efficiently (and with the added advantage of being exposed to the competitive marketplace). It’s called a 401k MEP – essentially a group 401k where different companies can send their employees to save for retirement..
Nevin E. Adams, Chief of Marketing & Communications at American Retirement Association in Arlington, Virginia, says, “There has been plenty of legislative activity regarding retirement plan MEPs – and it’s been remarkably bipartisan.” In a recent article (“Obama Administration Wants to Open Door for Open MEPs,” NAPA Net, January 26, 2016) he wrote “The MEP concept has enjoyed bipartisan support on Capitol Hill, and there have been a number of bills introduced that include it, notably Senate Finance Committee Chairman Sen. Orrin Hatch’s SAFE Retirement Act, the Small Businesses Add Value for Employees (SAVE) Act of 2014 (H.R. 5875) sponsored by Reps. Ron Kind (D-Wis.) and Dave Reichert (R-Wash.), and last year Sens. Susan Collins (R-Maine) and Bill Nelson (D-Fla.) introduced the Retirement Security Act of 2015 (S. 266), as did Reps. Vern Buchanan (R-Fla) and Ron Kind (D-Wisc.) in the House of Representatives (H.R. 577). It’s also a topic for a Senate Finance Committee hearing scheduled for later this week on ‘Helping Americans Prepare for Retirement: Increasing Access, Participation and Coverage in Retirement Savings Plans.’”
This new legislation is intended to address some obstacles the DOL has thrown up to stymie the development of the 401k MEP. Where and how does the 401k MEP being discussed by congress differ from the existing 401k MEPs? “First of all, it eliminates the requirement that a ‘nexus’ or ‘commonality’ exist between adopters (as is required in a MEWA),” says Terrance Power, President/CEO of The Platinum 401k, Inc. in Clearwater, Florida. “Secondly, any concerns over the ‘one bad apple’ adopter issue is completely eliminated. Also, the proposed legislation will allow all the adopters in an Open MEP to come under one global Form 5500 and one audit. This will drastically reduce costs to larger employers and bring smaller employers under the independent review of a CPA on an annual basis. Finally, as I recommended to the ERISA Advisory Council during my testimony before them in August 2014, we expect there to be a formal structure put in place for these types of programs that will minimize the chance of ‘bad actors’ benefiting from nefarious actions. This is an important part of the overall solution to efficiently and safely expand retirement plan coverage for America’s workers.”
Despite the bipartisan support, 401k MEP legislation has failed to advance. Zgainer speculates this may be because “they might want to revisit the reasons why they cracked down on these in the first place. Every one of these we have seen, has been marketed as a way to pool resources and get a better plan and a lower cost structure. This sounds good on paper until everyone puts their hand into the pie. What we see is that ultimately, it turns out to be a potential reduction in fiduciary liability at a premium price. Better options are available via the private sector, but again, there needs to be a better way to get this information to sponsors. If I am an insurance broker doing your medical benefits, and you ask me for a 401k, I can only show you certain vendors due to how I get paid versus the employer seeing the whole menu and selecting. In my personal opinion, one redeeming quality of the MEP is the potential of reducing some 5500 audit burden and associated annual costs for plan sponsors that cross the threshold of eligible participants and are therefore required to complete an audit each year.”
Power says there are a couple of reasons why we haven’t seen any bills passed regarding the 401k MEP. “First,” he says, “things just move slowly in Washington. 2016 marks the fourth year in a row that Senator Hatch, Chairm and of the Senate Finance Committee, has a proposed legislative solution on the table to expand the availability of Open MEP’s to employers across the country. In the wake of what appears to be full bipartisan support (including the White House now), implementation of the legislation is only a matter of time. The Department of Labor’s Advisory Opinion in 2012 that cut back a few of the benefits of certain multiple employer plan arrangements put them at odds with Treasury and Congress. I think the comments made by Secretary Borzi as it pertains to promoting multiple employer plans as the proposed ERISA-based solution to the growing trend of state-sponsored plans for unrelated private sector employers, as well as the recommendations of the DOL ERISA Advisory Council concerning their report on Outsourcing Employee Benefit Plan Services, have also helped to make the case for expanding these types of programs.”
Haywood wonders if there appears to be a simpler solution. He says, “The White House mentioned in their January 26th press statement Building a 21stCentury Retirement System that a MEP will offer ‘benefits through the same administrative structure but with lower costs and less compliance burden.’ Why don’t we ask Congress to decrease the compliance burden, so small businesses can run their own plan?”
Along similar lines, Holmes Osborne, Principal of Osborne Global Investors, Inc. in Odessa, Missouri, says, “It’s true. Not enough people are saving for retirement. There is a fix but it wouldn’t be simple. Employers should mandate that employees save 10% to 15% and have a healthy match. I’ve never seen this done but it would work. We already have the tools, they just aren’t being utilized.”
Ironically, just last week in a separate hearing, Alicia Munnell addressed this very issue. She suggested legislation be passed to make “auto-enrollment” and “auto-escalation” be the default of all 401k plans and that auto-enrollment start at 6%.
Now that’s certainly a more positive opening when it comes to the government’s role. It’s not a mandate, it is a default that allows for opt-outs; thus, preserving the important facet of choice.
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