18 November 2018

Small Companies’ Path To Joint Plans

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A new Labor Department rule would make it easier for small businesses to offer 401(k) plans, part of an effort to close a retirement-plan coverage gap that affects millions of employees.  

The proposed regulation would allow companies to band together to offer 401(k) plans sponsored by entities including business associations. Such arrangements, often called multiple-employer plans, are allowed now for employers with an affiliation or connection, such as companies with a common owner or members of the same industry trade association.  

The regulation—which the department said could go into effect as soon as early 2019 after a period for comments and possible revisions—would loosen those restrictions by allowing companies in other types of business associations to join together to offer a retirement plan. Examples might include a Chamber of Commerce, according to a senior Labor Department official.  

Companies of any size can join these plans, but small and midsize firms would likely have the most to gain in terms of cost savings.  

Such plans would be able use their size to bargain for lower administrative and investment fees than small businesses might otherwise be able to secure.  

According to the Labor Department, participants in 401(k) plans with assets that range from $1 million to $10 million pay a median 1.11% in fees, versus 0.27% for a plan with assets over $1 billion.  

The entity or association sponsoring the 401(k) plan would serve as the fiduciary and have responsibility for setting up and running the plan. But the employers would retain fiduciary responsibility for selecting the plan to begin with, according to the senior official. Under the DOL proposal, companies would be free to decide whether to offer a matching contribution and, if so, at what level, the official said.  

The Labor Department’s move is the latest in a recent series of initiatives from lawmakers aimed at addressing a retirement savings deficit that has left about half of American households at risk of being unable to maintain their standard of living in retirement, up from 45% in 2004, according to Boston College’s Center for Retirement Research.  

President Trump in August ordered the Treasury and Labor departments to take this and other steps to better prepare American workers for retirement. The order directed the Treasury to look into protecting members of a multiple-employer plan from penalties if one company violates the rules—for example, by failing to funnel employee contributions to the plan on schedule.  

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