September 12, 2018 / 6:40 PM / 9 months ago

COLUMN-U.S. gov't seeks to help small-business workers save for retirement

 (The opinions expressed here are those of the author, a
columnist for Reuters.)
    By Mark Miller
    CHICAGO, Sept 12 (Reuters) - Carrot or stick?
    Both approaches have advocates when it comes to a critical
retirement security goal: getting more workers at small
businesses to save for retirement.
    The carrot strategy calls for making it easier for small
employers to offer 401(k) accounts to workers by reducing cost
and administrative burden. The stick is a possible requirement
that small employers who do not offer their own plans allow
workers to contribute to government-sponsored Individual
Retirement Accounts (IRAs).
    A growing number of states have been tackling the
small-business coverage problem by creating these auto-IRA plans
- and the stick is rather small. In most cases, employers above
a certain size are required to set up automatic payroll
deduction for workers. Employers are not required to make
matching contributions or to administer the plans.             
    But President Donald Trump announced his support recently
for the carrot - a concept known as open multiple-employer
plans, or MEPs. Trump signed an executive order late last month
directing the government to consider ways to liberalize rules
governing these retirement plans, which already enjoy bipartisan
backing in Congress and strong support from the financial
services industry.
    The executive order also directs the U.S. Department of
Treasury to review the formulas to determine how much retirees
must withdraw from tax-deferred accounts annually, with an eye
toward letting them keep more of their savings longer. 
    What exactly constitutes a "small business" varies depending
on industry and other factors, with some definitions capping the
number of employees at 1,500 and others at just 10.
    So what is an open MEP, and why might we need them? 
    Data shows that workers at small businesses are far less
likely to be offered a 401(k) plan than their counterparts at
larger companies. Just 28 percent of U.S. firms with fewer than
10 employees offered workers a plan in 2012, according to
research by the Social Security Administration. The coverage
numbers were higher for companies with 25 to 49 workers (63
percent) and those with 50-99 workers (73 percent). By
comparison, 87 percent of firms with 100 or more workers offered
their workers a 401(k) plan.
    At present, MEPs can be offered only to companies in the
same industry or profession; the executive order directs the
U.S. Department of Labor and the U.S. Treasury to issue new
rules making it easier for small businesses from diverse
industries to join open MEPs.
    The open-MEP idea has been gaining bipartisan support in
Congress - it is a key component of the proposed Retirement
Enhancement and Savings Act (RESA).              (
    "Basically, we will be trying to find policy ideas that will
help make joining a 401(k) plan a more attractive proposition
for small employers, to the ultimate benefit to their
employees,” Preston Rutledge, assistant secretary of labor for
the Employee Benefits Security Administration, told reporters on
a recent conference call.
    Major business organizations representing the financial
services industry have been pushing open MEPs aggressively, in
part as the alternative approach to the state-sponsored plans,
which they view as inferior to the 401(k) plans they operate for
employers. And the Trump administration backed them up. Last
year, it successfully promoted legislation that reversed an
earlier Labor Department rule that established guidelines for
state and local governments to set up the plans. 
    Carrot and stick both have their place in boosting the
availability of retirement plans at small firms, argues John
Scott, director of retirement savings at the Pew Charitable
Trusts. “These are complementary ideas,” he said in an
interview. He views the state auto IRA plans as good starter
accounts for workers. Oregon was the first out the gate with a
plan and eight other states - including California and Illinois
- are getting ready to launch.
    The plans enroll workers by default unless they opt out.
Initial contribution levels range from 3 to 5 percent, with
contributions invested in low-cost target date funds. But they
lack some of the most attractive features offered by large
employers' plans, such as matching contributions and higher
annual contribution limits. This year, you can contribute $5,500
to an IRA ($6,500 if you are age 50 or older), but the
contribution limit for employees to 401(k) accounts is $18,500.
    The executive order also calls for a review of the formulas
used to determine the amount of required minimum distributions
(RMDs) from tax-deferred retirement accounts. When you reach age
70-1/2, a certain amount of your tax-deferred savings in IRAs
and most 401(k) accounts must be drawn down every year under the
RMD rules. And younger people need may need to take RMDs on
inherited IRAs.
    Missing an RMD leaves you on the hook for an onerous 50
percent tax penalty, plus interest, on the amounts you failed to
draw on time. Income taxes must be paid on the withdrawn funds,
and RMDs also can trigger additional taxes on Social Security
income and even high income Medicare premium surcharges (
    The order directs the U.S. Treasury to consider whether the
tables should be revised in light of rising longevity (the life
expectancy tables were last revised in 2002). Meanwhile, average
life expectancy for men aged 70 and above has risen 2.1 years
since 2000, and 1.6 years for women, according to the Society of
Actuaries. That means any revisions likely would have a very
small impact on the amounts retirees must withdraw - no more
than a few hundred dollars annually in most cases.
    “The RMDs aren’t that big to start with,” said Ed Slott, an
author and retirement expert.  "Unless you’re talking about a
mega-IRA, adjusting the tables for higher longevity won’t shave
off even a percentage point in the amount you must take.”
    Some proposals for reform of RMDs would go further than
reviewing the longevity assumptions. This week, Republicans in
the U.S. House of Representatives called for elimination of RMDs
from accounts with $50,000 or less as part of a broader set of
tax cuts billed as “Tax Reform 2.0”              (

 (Reporting and writing by Mark Miller in Chicago
Editing by Matthew Lewis)
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