Benefits Products & Services

Cracking open the small business retirement market

The government is on your side—No, really

By Thomas A. McCoy, CLU

The nation has a retirement savings shortfall, and it's getting the attention of legislators.

The good news is that some of the remedial strategies being considered, both by government and by industry representatives, could open new opportunities for employee benefits brokers and advisors.

Generally, the discussion within the industry concerning retirement insecurity focuses on making improvements to existing defined contribution plans—encouraging better communication with participants, a better product line-up and the like. But there's another, unrelated contributor to the problem of under-funded retirement: A large number of small businesses offer no retirement plan at all.

According to U.S. Census estimates, only 29% of workers employed by businesses with fewer than 100 employees have access to employer-sponsored retirement plans. By comparison, 81% of workers in companies with 100 or more employees have access to such plans.

Recent figures from the Employee Benefit Research Institute (EBRI) confirm this trend and further indicate that among very small companies (fewer than 10 employees), only 18% of employers offer retirement plans to their workers. Also, the average retirement savings balance for employees with a retirement plan at work is almost six times greater than the balance for those without a workplace plan, according to EBRI figures.

Senator Herb Kohl (D-Wis.) and Senator Mike Enzi (R-Wyo.) plan to introduce bipartisan legislation that could significantly expand the availability of defined contribution retirement plans to small businesses, whose owners currently are disinclined to offer such plans because of administrative expenses and liability concerns. They want to expand on an idea that has been in existence for a while but thus far has not worked terribly well: Multiple Employer Plans (MEPs).

MEPs give employers access to 401(k) plans through affinity groups such as trade associations. Individual employers get the backing of the affinity group for some aspects of plan administration, but the individual employers still must make plan design decisions and assume fiduciary and tax risks. Liability for mistakes involving even "one bad apple" among the businesses in the affinity group can inure to other participants in the group.

The Kohl-Enzi proposed bill would streamline the pooling of retirement plan assets among small employers by creating a standardized plan document for all providers and would use third-party financial experts to assume fiduciary responsibilities and relieve employers of administrative duties.

Kohl is chairman of the Senate Special Committee on Aging. In March, the committee held a hearing to explore ways to facilitate the offering of retirement plans by small businesses. One of those testifying at the hearing was John J. Kalamarides, senior vice president of institutional investment solutions for Prudential Retirement. He proposed establishing a program of "multiple small employer plans" (MSEPs) that has many of the features and goals advocated by Senators Kohl and Enzi.

Pru's plan would enable small employers (fewer than 100 employees) to participate in a multiple employer plan while transferring fiduciary and plan administration responsibilities to a single outside fiduciary. The individual employer's liability would be limited to making timely employee contributions to the plan. Unlike regular 401(k) plans, no employer contributions would be permitted.

Under this proposal, organizations eligible to be MSEP sponsors would include not just those with a common interest—such as the same trade or business—but also financial institutions that are qualified to serve as a trustee or issuer of an individual retirement plan under Internal Revenue code regulations.

In other words, a broker who represents a qualifying retirement plan provider, such as Prudential, could amalgamate a number of clients from disparate businesses and administer a MSEP for the employees of those clients. Kalamarides explains how this would work.

"Instead of an individual broker needing to have each of its small employer clients contract with multiple record keepers, the broker could manage all of them in a unified plan with a single investment lineup and a single service provider. It would bring the service quality, price and investment lineup of the large market down to small employers—all delivered by the independent broker."

The back-office solutions and the investments would be in the hands of the financial services provider, Kalamarides explains. "Service providers such as Prudential would compete—based on service, price and investment performance—for independent agents' blocks of businesses that could all be bundled together in a single multiple employer plan.

"Brokers really like the MSEP concept," he says. "They're excited about possibly being able to double or triple the size of the available market for small business retirement plans."

He adds that these plans might work well for property/casualty agencies that write employee benefits business. "The brokers wouldn't have to be experts in plan design. The model plan would already be in place. They would simply choose the provider."

To create a small business retirement plan program that tracks with what Prudential and others envision will require Congress to pass a bill. Kalamarides believes that is not likely until after the fall elections—most likely not before the 113th Congress is seated next year.

Momentum, however, is substantial. Kalamarides notes that two bills are under discussion in the House and two bills in the Senate—including the Kohl-Enzi proposal—with the objective of boosting retirement plan participation among small businesses. One bill is the Automatic IRA Proposal, which has the support of the Obama administration. That proposal "would include within qualified plans the concept of pooling, model plan design, and fixing the joint and several liability issue," says Kalamarides. "All of these proposals have bipartisan sponsorship, so I'm confident that there is support for this concept."

Whatever plan might emerge from the legislative process will be championed as a means of addressing the nation's retirement savings problem. At the same time, it will be touted as helping small businesses and their employees. These are both politically popular goals.

Independent benefits brokers and advisors with small business clients may have some new opportunities.