Micro companies are lagging their larger counterparts by a good margin when it comes to how many offer 401(k) plans to their workers.
The Current State of 401(k)s: The Employer’s Perspective, a study by Transamerica Center for Retirement Studies, found that only 72% of micro companies — those with fewer than 100 employees — offer a retirement plan to their employees, compared to 92% for companies with more than 500 employees.
This opens the door of opportunity to companies willing to serve the micro company market, says Catherine Collinson, president of Transamerica Center for Retirement Studies. It also reinforces the country’s need to reform laws regarding multiple employer plan arrangements.
Transamerica surveyed 1,000 employers and 4,550 workers about retirement savings. It found that both workers and employers believe retirement benefits are important, with 89% of workers saying that a 401(k) plan or similar benefit is important and 84% of employers believing that workers see such a benefit as important.
One way to get smaller employers to offer retirement plans is to allow them to join a multiple employer plan. Currently, multiple employer plans are only offered to professional employer groups and trade associations.
“As we look to increase plan sponsor rates, if a company feels it is not large enough or it is concerned about cost or not having the wherewithal to stand alone, a multiple employer plan is a good alternative for them,” Collinson says.
That’s why Collinson and other industry experts would like to see the definition of who can sponsor and join a multiple employer plan broadened. She also would like the so-called “bad apple rule” eliminated. Under current law, in a multiple employer plan arrangement where there are a number of adopting employers, the noncompliance of a single adopting employer could jeopardize the qualification status of the entire plan.
“Eliminating the ‘one bad apple rule’ would be codifying corrective action in a multiple employer plan situation where one employer is not compliant,” she says, adding that she has never seen a multiple employer plan that was disqualified because of one noncompliant employer.
“As the conversation intensifies for coverage, the concept of an open MEP would make it easier and more cost-effective for small businesses to offer a qualified plan to employees without taking on all the responsibilities of establishing a standalone plan,” she says.
Collinson and other industry leaders have testified before various Senate committees in support of open multiple employer plans.
The Insured Retirement Institute’s President and CEO, Cathy Weatherford, said in a statement that “workplace plans are a powerful tool in helping Americans save and prepare for their retirement years. Unfortunately, too many Americans don’t have access to a retirement plan at work, leaving many ill-prepared to meet their future financial needs. This coverage gap is most acute among workers [at] small businesses. Allowing more startups and small businesses to join multiple employer plans would greatly increase the number of workers with access to a workplace plan and go a long way toward helping Americans prepare and save for their future financial security.”
Another gap in retirement coverage is for part-time employees. The Transamerica report found that “while 74 percent of employees offer a 401(k) or similar plan to their employees, only 38 percent of them extend eligibility to part-time workers.”
Large plans are more likely to extend these benefits to part-time workers than small or micro plans.
Of the plan sponsors who don’t offer retirement benefits to their part-time workers, 91%said they don’t plan to do so because it is either impractical or costs too much or because of the high turnover among part-time workers.
“We could increase plan sponsorship rates to 100%. If companies are not extending eligibility to all employees, there are segments of the workforce being left out,” Collinson says. “So a critical component is extending access to part-time employees.”
Automatic features can help drive employees to save for retirement. The Transamerica report found that 71% of workers like the idea of being automatically enrolled in a workplace retirement plan. Those workers also believe that the automatic deferral rate should be at least 6% of salary, where the average today is still 3%.
More than 65% of workers said they would likely take advantage of annual automatic increases to their retirement plan contributions. “Unfortunately,” Collinson says, “we see a low response rate among employers offering it and a high response from workers who find it appealing.”
She adds that one of the most important things plan sponsors can do when meeting with their benefits advisers and retirement plan consultants is to “have a conversation with them about these things and revisit if it is right for them. What works for some doesn’t necessarily work for all. Raise the question, ‘is this right for us?’ and get cost estimates.”ction=W�/p
