Five reasons President Trump’s effort to promote employer retirement plans could boost retirement security
Retirement savings are crucial to financial security later in life. But only about half of workers participate in a retirement plan at work, and 50 million workers lack access to an employer retirement plan. The Obama administration worked to promote and protect retirement savings, but some of those promising efforts have since been eliminated.
In spring 2017, President Trump signed legislation rescinding recent rules that provided regulatory relief to state- and municipal-run individual retirement accounts (IRAs) for workers without access to employer retirement plans. That summer, the administration also dismantled the new myRA program, which allowed workers without a workplace retirement plan to contribute to a retirement account through automatic payroll deductions.
And last June, a federal appeals court struck down the Obama administration’s pending fiduciary rule, which would have required financial advisers to act in their client’s best interests when managing retirement accounts, after the Trump administration delayed implementation.
But on August 31, President Trump took an important positive step to help workers save for retirement, signing an executive order that could make it easier for small businesses to set up retirement plans for their employees.
The order directs the Labor and Treasury departments to consider easing regulations governing multiple employer plans (MEPs), through which employers can jointly offer retirement accounts to their employees. By allowing employers to work together, MEPs can reduce the start-up, administrative, and compliance costs of an employer-sponsored plan, especially for small businesses, likely boosting employee coverage rates.
MEPs already exist, but current rules require employers to share some bond, such as operating in the same industry, to participate together in a MEP. President Trump wants to eliminate that restriction to expand their reach.
President Trump’s initiative could significantly boost retirement savings for several reasons.
1. Most people save for retirement through workplace accounts.
Our analysis of data from the 2016 Survey of Consumer Finances shows that half of people ages 55 to 64 without a retirement account have less than $500 in savings. In contrast, half of people that age with a retirement account have more than $100,000 in savings. Enrolling more workers in retirement plans would raise retirement savings.
2. Few small businesses offer their employees a retirement plan.
Bureau of Labor Statistics data indicate that in 2017, only 46 percent of private-sector establishments employing fewer than 100 workers offered a retirement plan, compared with 94 percent of private-sector establishments with at least 500 workers. One-third of employees work at establishments that employ fewer than 100 workers.
3. More small businesses would likely offer their employees a retirement plan if they could join a MEP.
In a 2017 Pew survey of small and medium-sized employers that did not offer a retirement plan, 71 percent cited start-up costs and 63 percent cited administrative costs as reasons for not sponsoring a plan. Small businesses could reduce the cost of providing their workers a retirement plan by joining a MEP.
4. MEPs are generally more effective than the myRA program at getting workers to save.
Unlike the defunct myRA program, MEPs allow employers to automatically enroll employees, raising the chances that they will participate and save part of their paycheck for retirement. Behavioral economics teaches us that defaults shape behavior, as many people simply follow guidelines from employers and the government. Evidence shows that employers can raise participation in 401(k) retirement plans more than 25 percentage points by automatically enrolling employees. Employees can opt out, but few do.
5. Employees would likely save more in MEPs than in state-run IRAs.
MEPs, unlike state-run IRAs developing in many places, enable employers to match a portion of their employee’s retirement accounts, increasing the likelihood that employees will participate and that they will accumulate significant retirement savings.
An important first step
The financial problems facing Social Security and Medicare, coupled with forecasts of growing federal budget deficits, make expensive new public initiatives less appealing. But extending tax breaks to more workers through employer-sponsored retirement plans would modestly reduce federal tax revenues, creating a window for potential bipartisan agreement.
President Trump’s executive order won’t accomplish much on its own. The Treasury and Labor departments must hash out the details and determine how much they can do without congressional approval to make MEPs more available. But the president’s action is an important first step in addressing the nation’s retirement savings shortfall.
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