Forty years ago, Congress passed the Revenue Act of 1978 and added a single paragraph marked “(k)” to another wise yet obscure section of the Internal Revenue Code.
The real purpose was to place more parameters around pretax contributions made to cash or deferred plans. In reality, with fewer than 900 words, Congress created what is now a major piece of the retirement system. In 1981, the IRS then sanctioned the use of employee salary reductions as a source of contributions. This created a large boom and by 1984, there were over 17,000 401(k) Plans.
The system, which of course was never built to be a replacement for pensions, was built in a time and place when people worked very differently. Through a series of events, including new accounting rules, defined-benefit plans no longer made sense for many employers. Accordingly, the 401(k) plans filled that void.
Have 401(k) plans delivered all that was promised? For certain larger companies, the creation and operation of a 401(k) plan is a fairly straight forward exercise. However, where these plans have fallen short is the ease of other employers to establish these plans due to costs, administrative duties, and fiduciary concerns.
Approximately 38 million private-sector employees in the United States do not have access to a retirement savings plan through their employers, according to the DOL, which cited administrative costs and compliance requirements as the chief reasons why small businesses don't offer a retirement-savings benefit. The Spark 401k Survey (on behalf of Capital One, a financial services firm) polled 500 U.S. business owners at companies with 50 or fewer employees) found that 59% of small business owners said their businesses were too small to set one up, while 16% believed plan costs were too high.
The DOL is proposing a fix that would afford the opportunity for more employers to come together and share a single 401(k)-type plan, reducing costs and administrative duties that each employer would otherwise bear alone.
This approach could help small businesses that are unable to provide employees with a retirement plan to start offering this benefit. Congress does continue to consider various legislative fixes that will do even more to ease the use of multiple-employer defined contribution retirement plans.
The proposed rule would permit businesses to join to offer 401(k) plans through association retirement plans (ARPs) and other multiple-employer plans (MEPs). These would be similar to those created by professional employer organizations (PEOs) that contractually assume a majority of employment responsibilities for their client employers.
The employers would not be viewed as sponsoring their own plans under the Employee Retirement Income Security Act (ERISA). Rather, the ARP—or PEO-sponsored MEP—would be treated as a single employee benefit plan for purposes of ERISA. The ARP or MEP sponsor, and not the participating employers, would generally be responsible as plan administrator for complying with ERISA's reporting, disclosure, and fiduciary obligations.
The other attractive feature is that ARPs could be offered by associations of employers in a city, county, state or multi-state metropolitan area, or in a particular industry nationwide. At the other extreme, sole proprietors, as well as their families, would also be permitted to join such plans.
Fiduciary liability may be reduced for participating employers, as the proposal permits the designation of a named fiduciary who will have the responsibility for some but not all fiduciary requirements. One of the downsides of this arrangement would still linger. Specifically, each employer cannot be responsible only for its plan administration. As such, the administrative error of one sponsoring employer may in fact ruin the qualified status of the plan for all employers.
Legislation Before Congress
In September 2018, the U.S. House of Representatives passed the Family Savings Act, which would let unrelated small employers partner in a common MEP. The MEP provisions in the Family Savings Act are similar to those in a bill that the Senate sponsored called the Retirement Enhancement and Savings Act (RESA). These legislative proposals go further to permit open MEPs that could be sponsored by associations whose members are unrelated by either industry or location. They would also appear to remedy the issue raised above regrading fiduciary liability by expressly limiting liability to only those that caused certain administrative errors.
In the final analysis, any combination of these changes would create a windfall for small businesses and others by creating negotiating leverage and economies of scale that until now, only much larger organizations have benefited when dealing with the financial institutions that offer retirement plans.
Elliot Dinkin is president and CEO at Cowden Associates, Inc., specializing in helping corporate clients find the best solutions, both for the enterprise and its employees, with regard to compensation, healthcare benefits, retirement and pension issues, and Taft-Hartley fund consulting.
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