As part of an end-of-year spending deal, Congress passed the Setting Every Community Up for Retirement Enhancement (SECURE) Act, which President Donald Trump signed into law on Dec. 20. A significant advance in federal retirement policy, the package combines an array of long-discussed proposals intended to boost savings by private sector workers.
The changes should help narrow gaps in access to employer-sponsored plans, but additional actions, such as those already being undertaken at the state level, would give more workers—particularly those at small to midsize employers—opportunities to save for retirement. Before final passage in the Senate on Dec. 19, the House voted 417-3 in favor of the measure May 23.
Perhaps the most important provision of the SECURE Act is the endorsement of “open” multiple employer plans (MEPs), also referred to as pooled employer plans or PEPs, which allow unrelated businesses to join a single shared plan. Current rules require that employers share a common relationship—such as operating in the same industry—to join a MEP. Proponents argue that a single plan open to all employers will provide economies of scale and reduce overall costs because the participating businesses share expenses and administrative burdens—constraints that employers without plans often cite.
Still, estimating how successful open MEPs might be at expanding coverage and increasing the number of workers saving for retirement is difficult. Although MEPs may reduce the plan responsibilities of individual employers, widespread adoption will rely on the financial industry to market and sell plans, an approach that, according to the Social Security Administration, has left about half of all small employers without workplace coverage. And experience shows that lower costs may not be sufficient to drive plan adoption by some employers.
Although a variety of low-cost options just for small businesses exist—such as the Savings Incentive Match Plans for Employees (SIMPLE) and state-facilitated online plan marketplaces—the proportion of employers offering retirement benefits has changed little over the past decade. According to the Investment Company Institute, plan costs have steadily declined for at least the last seven years, but that has not spurred greater takeup.
In fact, according to the Pension Research Council, the percentage of U.S. employees who work for employers sponsoring plans has actually fallen—from about 59 percent in 2000 to about 51 percent in 2013, the last year for which data are available. So, if plans are less expensive than in the past and reduced cost options are readily available, what is keeping employers from adding plans for their workers?
Analysis from behavioral economics provides a good place to start. Status quo bias—the preference for things to remain the same—could be one factor. An employer must make a significant effort to establish a workplace plan, which can prove to be a particularly high barrier for smaller businesses in their early years. Despite their benefits, MEPs, SIMPLEs, and lower-cost options in general do not address this stubborn hurdle.
But policymakers have other tools to boost retirement savings. In a promising approach to simplify the process for employers and employees, six states have implemented automatic individual retirement account programs (auto-IRAs). In these states, employers without plans can offer a savings arrangement through the auto-IRA without incurring the costs associated with researching and selecting a plan or managing the fiduciary responsibilities. Employers’ only responsibility is to facilitate worker contributions into the private savings accounts—a process similar to the payroll tax withholding that employers already perform.
Similarly, the automatic enrollment process limits complicated financial decisions for employees because the choice boils down to a simple decision: whether or not to participate. Additionally, because the plans are Roth IRAs, the savings are the employees’ personal after-tax assets, exclusively funded by their own contributions—and with no vesting period. That means they always have immediate and penalty-free access to their funds in an emergency and don’t have to worry about tying up savings for years until retirement.
Of course, auto-IRAs aren’t a replacement for traditional employer plans such as 401(k)s. An auto-IRA is intended to be a minimally viable savings arrangement for an employer and employees until a business is ready to adopt a more robust offering. By design, it is not intended to compete with the private plan market. For example, a 401(k) offers higher annual contribution limits than an IRA and allows employers to make matching contributions—a benefit that can help with recruiting workers and building account balances faster. Additionally, the government contracts with financial firms to manage the programs and investments to minimize the state’s role and engage the private market.
The states that are implementing auto-IRAs see these programs as a steppingstone that can help narrow the coverage gap. As of Oct. 31, OregonSaves—the first auto-IRA program, which launched in 2017—had created nearly 53,000 funded accounts and generated more than $34 million in savings. Passage of the SECURE Act is a major milestone that will bring many long-sought reforms—open MEPs chiefly among them—but the increasing number of states implementing auto-IRAs, and the number of workers participating in them, may portend the next retirement revolution.
John Scott is the director and Andrew Blevins is a principal associate with The Pew Charitable Trusts’ retirement savings project.