Finally, relief for 40 million Americans without 401(k) plans

Employer-sponsored 401(k) plans have become the primary method that Americans use to save and invest for their retirement, but it’s expensive and complicated for companies to provide a 401(k) plan.

That makes it difficult for small businesses, in particular, to offer a 401(k) plan. Many ultimately opt not to offer a plan, leaving nearly 40 million Americans without access to a workplace retirement plan.

A new Department of Labor rule that goes into effect Sept. 30 aims to change that. The rule, finalized in July, makes it easier for small businesses to join with others to offer multiple-employer plans, also known as MEPs, gaining the necessary scale to bring down costs for both employers and employees, potentially leading to greater growth in their retirement assets over time.

“This is a way to expand retirement plan coverage in the United States,” says Richard Rausser, senior vice president of client services at Pentegra, a provider of retirement planning and fiduciary outsourcing solutions.

A quarter of companies who don’t currently offer retirement benefits, or have plans to put one in place, say they would consider joining an MEP.

The rule allows a group or association of employers in the same industry or the same geographic location to form an MEP. Companies can also access an MEP via a third-party human-resources company that handles employment responsibilities on their behalf. To participate in an MEP, the companies must also be connected via an industry association or a regional group like a Chamber of Commerce.

It’s not yet clear how many trade or regional groups will ultimately offer such plans to their members, but Brian Graff, CEO of the American Retirement Association, says he expects to see strong interest.

“Associations are always looking at things they can do for their members,” he says. “If they can do something for their members that makes it more effective for their members to offer a retirement plan, then they’re going to do that.”

In today’s tight labor market, offering a 401(k) benefit could make small businesses more competitive when it comes to attracting top talent. Two-thirds of job candidates say that the quality of a company’s 401(k) is an important factor in their decision when weighing a job offer, according to a recent Betterment study. Companies that can offer an employer match will be even more attractive to potential employees, but there’s no requirement that employers provide a match.

The scale of MEPs will also make it easier for small employers to offer 401(k)s with some of the upgrades that have proved to boost savings. Examples of such features include auto-enrollment and auto-escalation, which automatically increases the percentage of savings each year up to a certain limit.

They may also be able to offer more digital tools, to help employees look holistically at their overall financial wellness. “What we really need to do in this industry is bring the big plan strategies to smaller plans and have their employee participants benefit from that expertise,” Rausser says.

The lower costs associated with an MEP may also free up employers to offer some sort of matching funds on employee contributions.

Enrolling in an MEP may lower the administrative and compliance burden for employers, but it will not eliminate it entirely. Employers who sponsor a retirement plan on behalf of their employees may have a fiduciary obligation to act in the best interest of plan participants, and they could personally be liable if they don’t uphold that duty.

In the case of MEPs, those fiduciary duties remain. That means making sure that the plan meets the requirements of the new rule, following the plan documents, monitoring service providers, and avoiding unreasonable expenses, says Wendy von Wald, fiduciary product manager at Travelers.

While the DOL regulatory change expands access to MEPs, some argue they don’t go far enough, since businesses still must have some connection to each other in order to team up for an MEP. The DOL has asked for additional comments on the rule change and signaled that there may be more to come.

There may also be change on the legislative side. Legislation making its way through Congress would go even further, allowing companies to form an MEP together, regardless of whether they have any other connection to each other. The Secure Act, which also contains several other provisions aimed at boosting retirement savings, passed overwhelmingly in the House in May but has failed to gain traction in the Senate.