Retirement Savings for Small-Business Employees

Saving enough money for retirement can be tough for anyone. But often it’s particularly difficult when you work for a small company. One out of every three American workers lacks access to a employer-sponsored retirement plan, including more than half of employees at firms with fewer than 50 employees, according to “Building a 21st Century Retirement System,” a White House fact sheet released in late January.

What’s more, independent contractors, part-time employees and temp workers often are ineligible for such plans. And those who can’t save via their jobs rarely save at all, the report added: “Fewer than 10% of workers without access to a workplace plan contribute on their own to a retirement savings account” like an IRA.

In its budget for fiscal year 2017, the Obama administration will try to address these shortfalls with a new wave of sweeping legislative measures designed to expand and overhaul our current retirement savings system. Many of these proposals apply specifically to small businesses and the manner in which they can offer retirement plans to their employees. Whatever happens to the budget, it’s worth learning about these options if you own or work for a small business.

MEP Plans

The cost of creating and maintaining a qualified retirement plan can be high for many small businesses. Some can partake in a Multiple Employer Plan (MEP), which allows many separate firms to adopt a single retirement plan that is available to their employees collectively. This arrangement effectively shares the costs of adopting and administrating the plan among all the employers in the group and thus makes the plan cheaper for everyone. But the current law mandates that only employers that have a “common bond” are able to do this, which generally means that they have to be in the same industry or belong to the same union. A firm that does not have access to other similar firms in its line of business is out of luck. For example, a group of construction companies are currently able to create an association that allows them all to be covered under the same plan umbrella, but a restaurant chain could not join them.

The President wants to remove the common bond restriction so that firms in any field can band together in order to create a single retirement plan for their workers. This would effectively allow a group of employers located close to each other, such as in a shopping mall, to participate in a pooled, cost-effective plan. It would also like to permit employees who move from one company to another within the same plan to retain their retirement accounts, so that no rollover or transfer of funds will be necessary. Expanding MEPs would also make it easier for nonprofit entities and certain other types of employers to offer retirement plans to contract employees and self-employed contractors (who usually can’t participate now).

Other Ideas

The administration’s revamp of the retirement system also includes:

  • Eligibility for Non-Staffers. Part-time employees who have worked at a company for at least 500 hours per year for three consecutive would automatically be allowed to participate in the company’s existing plan.
  • A Boost for Employers. Small companies that create a retirement plan are already eligible for a special tax credit (see Tax Credit For Plan Expenses Incurred by Small Businesses). That credit would triple. In addition, firms that add auto-enrollment to their plans would receive an additional credit.
  • IRAs for All. Employers that don’t offer a retirement plan would have to automatically enroll their workers in a traditional or Roth IRA. The myRA would also be available for all workers who don’t have access to any type of employer-sponsored retirement plan; they can directly deposit earnings into these accounts either through their employers or their banks.
  • Increased User-Friendliness. Plan portability would be simplified, making it easier for workers who change jobs to roll one 401(k) or other qualified-plan fund into the plan offered by their new employer and to avoid The 3 Most Common 401(k) Rollover Mistakes. Plan administrators and financial advisors would be compelled to offer advice that is free from conflicts of interest and unconditionally in the best interest of the worker.
  • Support for the States. About 20 states are now in the process of developing their own retirement plans, adding to the four already developed by Illinois, Oregon, Washington and New Jersey. The Department of Labor will be issuing further guidance and regulation on these state-sponsored plans in the near future, ensuring they work in tandem with existing federal laws.

The Bottom Line

President Obama’s collective proposed agenda would provide another 30 million Americans with the opportunity to start participating in an employer-sponsored retirement plan, the White House estimates. One key tenet would make it easier for many small employers to offer retirement plans to their workers via a MEP arrangement that will be much cheaper than individual plans.

The administration is also looking at several different ways to make all retirement accounts and plans more affordable and user-friendly. The ultimate agenda: to provide all American workers everywhere with an equal opportunity to save for retirement, building on the launch of myRA last autumn (see myRA: How it Will Work, Pros and Cons).

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