Employers serve a key role in employee retirement plans

Many academics and policymakers believe America has a retirement savings crisis because a substantial minority of workers do not currently have access to an employer-sponsored retirement savings plan.

Throughout its long history, the Plan Sponsor Council of America (PSCA) has supported measures to reduce plan sponsors’ cost and regulatory compliance burdens.

{mosads}Plan sponsors generally agree with proposed changes that would reduce or remove the barriers to adopting a tax-qualified retirement savings plans, including multiple employer plans (MEPs). 

However, one coverage “solution,” the Small Business Employees Retirement Enhancement Act (SBEREA), would essentially eliminate a plan sponsor’s fiduciary role. 

This would undermine protections that have been essential to the formation and integrity of today’s highly successful system of voluntary, employer-sponsored retirement plans and may well put millions of American workers’ retirement security at risk.

Since the beginning of the employment-based retirement system, the employer has occupied an integral role. It is one thing to consolidate routine plan administrative functions. It is something else altogether to remove the employer from their traditional role in the selection and oversight of an entity that will have control over a lifetime of retirement savings by its workforce.   

Retirement plans are not a distraction

Sponsoring a retirement savings plan doesn’t divert attention from business objectives. Rather, a retirement savings plan is an integral component of the employment value proposition — an essential aspect of a total rewards strategy for employers who seek to be an “employer of choice,” who maximize the value workers receive from the employer’s “investment.”

Offering a retirement savings plan actively and deliberately differentiates the employment value proposition from that of employers who do not offer benefits.

Most employers reject alternatives that would pay higher wages in lieu of offering benefits because benefits offer a unique “value-add,” specifically because:

• There are no comparable products and services in the individual marketplace;
• the tax preferences offered by employer-sponsored plans are unique and very valuable; and
• group dynamics help to facilitate cost efficiencies, create economies of scale and moderate risks.

Benefits improve the after-tax value of rewards. Benefits also deliver an enhanced level of “impactability” — maximizing the positive impact of rewards in addressing workers’ everyday financial challenges. Today’s 401(k) is often viewed through a lens of “financial wellness.” 

The employer’s fiduciary role is an essential connection

SBEREA legislation would eliminate the employer’s obligation to consider cost, competency, financial stability or the likelihood of fraud in choosing a pooled plan service provider and investments, setting aside protections that have been extended to participants since the passage of the Employee Retirement Income Security Act (ERISA) in 1974.

Why employers need to be involved in essential oversight

A benefit can quickly become a detriment should service levels deteriorate, such as if contributions are not timely (or accurately) invested, participant statements are incorrect or distribution requests are delayed.

Employers have a vested interest (literally) in ensuring that the provider to which it entrusts not only its workers’ retirement savings, but employer contributions as well, is not only well qualified, but will continue to be so in the future.

Since ERISA’s fiduciary responsibilities remain unaffected, the employer (or more likely workers) will shoulder any added costs. Workers wind up either with less fiduciary oversight, or they may be charged higher fees where the pooled employer plans (PEP) provider takes on added fiduciary risks. 

Moreover, SBEREA’s security requirements for pooled plan providers of registered PEPs may be inadequate. A provider who specializes in MEPs/PEPs may have significantly greater fiduciary liability exposure than the security required to register, introducing significant new risks for workers.

Proprietary pitfalls

For years now, so-called “open architecture” platforms, where the investment offerings of multiple best-in-class providers are available, have been the norm for workplace retirement plans. That was not always the case.

Where the employer has no fiduciary oversight, a MEP structure may well revert to a bundled/proprietary platform model, ultimately resulting in higher fees, reduced participant choice and less-than-optimal investment returns.   

Fiduciary concerns aren’t holding back plan adoption

The proposal to curtail an employer’s fiduciary role is apparently based on the mistaken belief that potential fiduciary liability is a major impediment to an employer who otherwise would adopt a retirement savings plan, but it just isn’t so. 

There is no extrinsic evidence that confirms fiduciary duties are impeding adoption of retirement savings plans. A Pew Charitable Trust study confirms 71 percent of surveyed employers cite expense as a reason they have not adopted a plan. Concerns about fiduciary liability were not even on the list.

A better open MEP or PEP nodel

An open MEP can address some of the issues that actually hold employers back — issues like cost and administrative complexity. The Retirement Enhancement and Savings Act of 2018 (RESA) offers most of the same relief promised by SBEREA without curtailing or undermining the employer’s key fiduciary role.  

Just before Labor Day, President Trump signaled his administration’s support for MEPs. 

While MEPs/PEPs will not resolve all of America’s retirement preparation challenges, the president’s executive order and legislative solutions already incorporated in RESA offer the potential for actual enhancements in coverage and security by removing barriers small employers face in adopting a retirement savings plan without introducing controversial and unnecessary changes to a plan sponsor’s fiduciary role.

Jack Towarnicky is the executive director of the Plan Sponsor Council of America (PSCA), a nonprofit trade association supporting employer-sponsored retirement plans. PSCA is part of the American Retirement Association (ARA).