According to the U.S. Census, roughly 59% of Americans have access to a 401K retirement plan, yet only 39% invest in their 401K. This low participation rate may be due to the fact that only about seven out of every fifty U.S. employers provide employees with access to this sort of retirement benefit.
All of that could soon change if the Retirement Enhancement and Savings Act (RESA) of 2018 moves forward in congress. This bill could allow pooled employer plans. To understand how pooled employer plans, or PEPs, work, lets first explore a type of plan that already exists.
Currently, related employers can contribute to an MEP or multiple employer plan, but the requirements to join are fairly strict. Employers must usually be part of the same industry, and they may even have to be part of the same working group to take advantage of the lower rates and fees associated with being part of an MEP group.
The 2018 version of this bill is the second version that has been released. A previous version was brought before congress in 2016, and a third, RESA 2019 has now been introduced. If RESA was to pass, it would loosen restrictions on multiple employer plans, allowing related employers who do not work under the same group to contribute to a shared group retirement plan.
The act may even loosen restrictions to the point that pooled employer plans between unrelated employers become a possibility. This would mean that community partners, employers in the same town or district, and other employers not related by industry could pool resources to offer 401Ks to their employees at a lower cost to all involved.
The creation of PEPs offers another incentive, lowering administrative burden. Rather than hiring a person to manage PEP contributions or placing those duties on current human resources staff at each place of employment involved, a Pooled Plan Provider would be selected to manage the entire group. Overall, this would be much more efficient for all parties, allowing the use of a single, standardized set of documents to share among the entire group.
While incredibly beneficial for employers who are already offering 401K retirement, the Retirement Enhancement and Savings Act has the potential to revolutionize small business. It is estimated that less than a third of small businesses, defined as employers with less than ten employees, offer a retirement plan. If RESA 2018 succeeds in loosening restrictions to the point of PEP creation, small business owners will be more able to offer retirement to their employees, an extremely beneficial proposal as nearly half of the U.S. workforce is employed by small businesses.
A January report from CNBC noted that the majority of Americans are not ready to retire by age 67. The Census Bureau also found that a fifth of retirement age Americans are working or in search of a job. RESA could change that for millions of workers, changing the landscape of our economy.
In addition, the implementation of PEPs may provide one last benefit to employers: enticing better candidates. Job seekers with more experience and education expect more and better benefits from their employers, and in many cases, benefits may be more important to workers than salary.
PEPs are an innovative idea that strip away barriers employers face to offering retirement benefits to their employees. They have the potential to cut costs, simplify administration, and open up 401K opportunities to the other half of the American workforce.