Will Opening Up Multiple Employer Plans Fix Our Retirement Problems?

Federal rules currently limit the use and appeal of multiple employer plans, or MEPs, which allow employers who are unable to offer retirement plans on their own to adopt a single plan shared with other businesses.

One of the rules prohibits unrelated businesses—that is, businesses that are not in the same organizational structure, industry, line of business, or profession—from joining a group plan.

But there’s reason to believe that some barriers could be removed, giving more workers the opportunity to save for retirement. Not only are MEPs attracting wider attention and support from employers, but allowing unrelated employers to adopt MEPs—often called open MEPs—is one of the few areas of agreement in retirement policy. Legislation to expand eligibility enjoys bipartisan support in Congress, and President Donald Trump recently issued an executive order that greenlights regulatory action for increasing access to MEPs. As a next step, the Department of Labor issued proposed rules—now in the public comment stage—that would modestly open up the plans.

Broadening access to MEPs raises several questions about their function and impact, to which existing research may provide some answers:

Would expanded MEPs cover the 25 or 30 percent of private sector employees who don’t currently have a retirement plan at work? Research by The Pew Charitable Trusts has found that small employers, who are less likely than large businesses to provide retirement benefits, are reluctant to offer plans because they anticipate high startup costs and administrative responsibilities. The use of MEPs could reduce expenditures and administrative burdens and thereby encourage more employers to offer a retirement plan. Pew research found that 61 percent of small employers would consider joining an open MEP. How many do so will depend on the details of the plan being offered.

Of course, an employer’s decision to join a MEP is voluntary—and lower costs, less time spent on administration, and other apparent advantages might not be sufficient to attract some employers to sign up. One challenge is that the lower costs might not come right away: Initially, MEPs might be marketed to existing large-plan sponsors in a bid to gain more assets instead of to small employers that don’t provide retirement benefits. Over time, however, plans that compete for existing business could accumulate sufficient assets that the plan administrator will lower fees, making them more attractive to small employers.

Even if an employer joins a MEP, would workers participate? Participation in small employer plans tends to be lower than in plans offered by larger employers, at least in part because larger employers are more likely to automatically enroll their workers in a retirement plan at a set rate of contribution with the employee having the ability to opt out. Although automatic enrollment has been very successful at expanding retirement plan participation, Pew’s research shows that many small employers are hesitant to use it, with executives of small companies most likely to say that their businesses were satisfied with their current setup or that employees wouldn’t like automatic enrollment. It’s an open question whether participation in a MEP would make small employers more willing to offer automatic enrollment than they are now.

Would contingent workers save for retirement in MEPs? Contingent workers—a diverse group that includes independent contractors, gig workers, temps, and day laborers, among others—have particularly low levels of access to retirement benefits. MEPs might be designed so that contingent workers could join one. But these workers often don’t have access to a payroll system that makes saving convenient, and income for many of them can vary, making regular contributions difficult. A MEP designed for the contingent workforce would have to account for the unique aspects of this segment of the labor force.

Would MEPs compete with, or complement, state-sponsored retirement savings plans? California, Connecticut, Illinois, Maryland, and Oregon, as well as the city of Seattle, offer retirement savings programs for private sector workers who do not have a plan at their workplace. Eligible workers are automatically enrolled in the plans—known as automatic individual retirement accounts, or auto-IRAs—although they can change their savings rate or opt out. These plans are a big deal: The California plan alone, when implemented, could cover an estimated 6.8 million workers, with assets that could reach $2 billion in the first year.

In theory, these state and municipal plans could be low-cost options that might crowd out private sector products such as MEPs. But state plans and private sector retirement products are not the same—and probably would not compete with one another. The amount that a worker can save, for example, differs—$5,500 in state plans versus $18,000 in a private-sector 401(k) plan—and employer contributions are not allowed in state plans. Many employers seem to favor private sector retirement plans, which include MEPs, over state plans: In Pew’s research, when employers were asked to choose between joining a state plan or starting their own private sector plan, 52 percent said they would start their own private sector plan.

In fact, despite the significant differences between state-sponsored plans and private sector MEPs, the two would probably exist in tandem and might even complement each other. State auto-IRAs could, in the short term, enable a small employer the chance to offer its workers a way to save for retirement; later, if the employer could afford a more robust offering, it could switch to a MEP.

Even with the president’s recent executive order, there’s no sure way of predicting whether policymakers will expand access to MEPs. And if the plans are opened up, it’s unclear exactly how they would work. For now, all we know is that MEPs have the potential to bring the benefits of retirement savings to many more Americans.

This article was originally published on Forbes on November 28, 2018.