Is the problem small, or the retirement plan?
It would appear the latter, according to Morningstar. The Chicago-based research behemoth is out with a new paper titled “Small Employers, Big Responsibilities: How Policymakers Can Address the Small Retirement Plan Problem.”
“In 40 years, the defined-contribution plan has ballooned from being an obscure corner of the tax code to being one of the key foundations of the U.S. retirement system,” the authors write. “However, the program has not expanded equally across all segments of U.S. workers.”
Effectively, they add, the defined-contribution system has evolved into two distinct segments: 1) large-company plans, which are mostly established and robust, and 2) small-company plans, which are often absent and are frequently weak even when offered.
It then proposes two complementary solutions for improving the number and quality of small-company plans:
- Create Open Multiple-Employer Plans (MEPs): Morningstar recommends opening MEPs, in which small employers band together and leverage a larger amount of assets under management to provide a better plan for their workers. Restrictions should be removed from MEPs as they currently exist, so that the current MEP becomes a truly open MEP. Such plans would allow small employers to offload many of their fiduciary responsibilities and to spread costs and administrative burdens. These plans could be open to self-employed workers, giving them an opportunity to save for retirement.
- Legislate Automatic IRA Enrollment for Employees Who Do Not Have Access to a 401(k): Permitting open MEPs would encourage more small companies to offer a 401(k) plan, but that legislation alone would not ensure complete coverage. Morningstar recommends automatic enrollment into an IRA account, so that all new employees would be enrolled in such an account with the standard automatic-enrollment opt-out feature. An automatic IRA enrollment program would be a single, national program, covering all eligible Americans.