Proposed Regulation Will Expand 401(k) Options To More Americans

The Labor Department is proposing a new regulation that would make it easier for small- and medium-sized businesses to provide affordable retirement options to their employees. For some time, small- and medium-sized businesses have struggled to offer 401(k) plans and, as a result, business owners and their employees have fallen behind on saving for retirement.

Administrative difficulties such as time-consuming set-ups, overwhelming paperwork, and complicated plan design are some of the arduous tasks that prevent businesses from offering 401(k) plans. Additionally, these businesses face fiduciary responsibility, out-of-pocket costs, and fees to service providers that can be quite burdensome. On top of all that, there is the chance that employees won’t even take advantage of the opportunity and participate in the qualified plan.

The proposed regulations, which could be implemented as soon as early 2019,  aim to ease the pains of small- and medium-sized employers interested in offering a qualified plan to their employees.

What’s changing?

If the new regulation goes into effect, small- and medium-sized businesses will have the opportunity to join with their trade group or business association under one qualified plan, allowing more Americans access to a qualified plan option. An example of the expanded definitions of ‘group’ under the proposed regulation would include a Chamber of Commerce.

Currently, owners of multiple small businesses can wrap them into one group, called multiple employer plans, and negotiate a more affordable plan as more assets will be under management. With the new rule changes, the businesses may not have the same owner, but there will still be some nexus through the trade group or business association to allow grouping.

One main advantage of expanding the definitions of groups under multiple employer plans is the reduced cost to business owners. Business groups, which will become eligible under the proposed rule, will have increased bargaining power regarding the recordkeeping, third party administration, and investment fees due to more participants and assets in the plan.

Who makes decisions?

Bringing together several entities under one plan raises many questions concerning liability. Under the proposed rule, each business is liable for its own actions. If there are 10 businesses in one group and one of those businesses doesn’t process payroll correctly and creates an issue with their employees’ accounts, they are solely responsible. Basically, whoever makes the mistake receives the blame and is responsible for fixing the issue.

Additionally, the issue of dissolving or exiting a plan comes into play with multiple business owners. It is not completely clear how these issues will be handled and many may be resolved through the creation of the plan document or made clearer in future revisions of the regulation prior to implementation.

Retirement savings

The United States is heading towards a retirement savings crisis.  Most employees nearing retirement age have little or no savings. The reality is social security will not cover the bills so it is crucial that businesses offer a 401(k) option to their employees. The proposed DOL regulation is one small step the government is taking to make it easier for workers to save for retirement.

By creating a qualified plan, employers can have greater leverage in recruiting and maintaining talent. A financial advisor can work with the whole group to ensure savings are maximized and financial goals are achieved.

Although no changes have been made to the regulation yet, look for modifications to the rules in 2019. Business associations, employer groups, and professional employer organizations will soon be able to offer their employees more options when it comes to retirement savings.