There are many stressors on the employer-provided system of retirement benefits. As a result of funding and cost challenges, we have seen the demise of the employer-provided pension plan and the rise of participant-directed savings plans. This development has been controversial, as exemplified by the debates regarding retirement savings rates, investment education and fee transparency, and the U.S. Department of Labor’s (“DOL’s”) fiduciary rule regarding investment advice. Many attribute the “retirement crisis” to the loss of these employer-provided pension plans, which secured a monthly income stream for employees in their retirement without requiring employee account management. As more workers must invest for themselves and turn also to individual retirement accounts, the law has now placed heightened responsibility and scrutiny on financial institutions and advisors to demonstrate that they provide retirement investors with unconflicted investment advice that is in the investors’ best interests, calling into question this approach to retirement savings as well.
Further complicating matters is the design of the workplace itself. Many workers are mobile, they may change employers or careers multiple times over the course of their working lives, and many have alternative work arrangements. These developments have created wider gaps among those offered, and eligible to participate in, retirement savings programs through an employer.
An unfortunate consequence of these competing pressures is that many employers may consider discontinuing retirement savings plans or not establish them in the first place. Government initiatives appear to have anticipated this progression, as evidenced by the following:
- President Obama’s call for portable benefits programs. In his fiscal year 2017 budget, President Obama called for the development of programs to provide grants to states and nonprofits to design ways to provide retirement and other employee benefits that can be portable and accommodate contributions from multiple employers. He also called for legislation regarding open multiple employer plans (“MEPs”) among unaffiliated employers to allow for pooled plans and continued contributions when employees move between employers participating in the same MEP. These initiatives would build upon earlier proposals for automatic payroll individual retirement accounts (“IRAs”).
- Automatic payroll IRA programs and other alternatives. For employers that do not sponsor any retirement savings plans, there is increased momentum for automatic payroll IRAs. To date, at least five states (California, Connecticut, Illinois, Maryland, and Oregon) have enacted legislation that will require certain employers that do not sponsor a retirement plan to enroll employees automatically in a state-run IRA program. New Jersey and Washington have approved retirement marketplaces for eligible employers to shop for retirement savings programs. Many more states are considering state-run IRAs and MEPs. These initiatives follow guidance from the DOL and complement the U.S. Department of the Treasury’s guidance regarding myRA accounts, as well as President Obama’s agenda.
In late August, the DOL issued final rules (subject to Congressional review) clarifying that state-run payroll deduction IRAs for private-sector workers without access to workplace retirement savings programs would not give rise to an ERISA-covered pension plan if certain requirements are met. Proposals have also been made to allow certain agencies and cities to run such programs where states do not act. Critics have noted that state-run, public employee pensions (as well as Social Security) have not existed without mismanagement and the proliferation of these programs will not be without risk to retirement investors, employers or tax payers.
Other legislative proposals include mandates for contributions to plans run by third parties or the federal government. The Senate and House have introduced similar bills this year calling for universal, individual retirement savings programs (e.g., S. 2472 and H.R. 5450: American Savings Account Act of 2016). These legislative proposals seek to amend ERISA to establish a new retirement fund for all employees (with an exception for collectively bargained employees) and self-employed individuals which operates in a manner similar to the Thrift Savings Fund, which is available to federal employees, and would be managed by a Board (appointed by the President) who would select a list of investment funds and options, among which participants may choose. Monthly contributions would commence at 3% of compensation. These bills appear to exempt employers from contributing to the American Savings Accounts if they are subject to a state mandated program, thus contemplating a new landscape of state-run and federally-run savings programs and the bureaucracy that implies.
Although there are not yet definitive solutions to solving the retirement crisis, it is clear that many different approaches are being explored in order to fill in the savings gaps. - Notably, the trends affecting retirement as well as health plan programs have a common theme of mandated participation in either a state-run or federally-run program, in the absence of a qualified employer program and noncompliance penalties.
In order for employers to retain control over the very tools that enable them to compete in the race for talent, it is important for employers to consider their own philosophy concerning employee benefits and the types of programs that they desire to offer their workers across their workforce. It is also necessary to assess compliance efforts with any programs that may be mandated by changing laws. In this evolving landscape, an employer should:
- examine its organization’s workforce and determine which benefits programs it desires to offer workers in a competitive marketplace;
- identify any gaps in benefits offerings and consider how to fill those gaps;
- assess how costs associated with offering employee benefits comprise workers’ overall compensation and can be built into a competitive model which may include employer matching or other contributions to employee savings accounts;
- monitor legislation affecting employee benefits and applicable compliance requirements;
- determine whether its organization is subject to laws that will require it to comply with certain government-mandated programs and decide whether it is instead desirable to establish, or expand coverage under, an employer-sponsored plan;
- evaluate plan design options that can provide portability features under an employer-sponsored plan;
- retain advisors and service providers that can assist with plan administration, investments and compliance;
- advocate for solutions that will make it less burdensome for employers to provide employees with retirement savings programs; and
- voice any concerns about the trends in the laws affecting employee benefits in order to preserve the advantages associated with employer-sponsored programs that serve to benefit employees and differentiate employers in the talent wars.
Michelle Capezza is an employee benefits and executive compensation attorney and a Member of EpsteinBeckerGreen, resident in their New York office. She can be reached at firstname.lastname@example.org and 212-351-4774.