Many small business owners are unable to offer their employees retirement savings plans because they are overwhelmed with concerns regarding current regulatory issues and fiduciary responsibilities. This situation has become more critical in the past decade. The Federal Reserve issued a report last year showing that less than half of all private sector employees are saving for retirement. Their report also showed that this number is declining with only some 40 percent of households enrolled in any type of retirement savings plan in 2014, compared to 48 percent in 2007. Concerns about an overburdened Social Security system underscore the need to find ways to help workers plan and fund their retirement.
In order to address this situation, almost half of the state legislatures are creating a government-sponsored automatic individual retirement account (IRA) to provide employees who have no employer-sponsored retirement savings plan with a way to save. To date, California, Illinois, Oregon and Washington have taken steps to launch Secure Choice Pension programs. California and Washington are poised to launch their enrollment in 2017. Some regulatory concerns have yet to be resolved, but recent action from the White House suggests that the President wants to fast-track revisions to current regulations. Here’s what is at stake:
- Not surprisingly, small businesses have been less likely to offer plans to their workforces because they lack the resources – financial and staff – to manage the costs and regulatory requirements of 401(k) plans.
- Since 2010, President Obama has been trying in vain to get Congress to approve a national IRA program initiative. Recently, the president has switched his focus from the lawmakers on Capitol Hill to the states involved in launching Secure Choice Pension initiatives. He is urging the U.S. Department of Labor to clarify issues involving the Employee Retirement Income Security Act (ERISA), which is a major sticking point for the efforts initiated by various states.
- Those states involved in creating these new retirement saving options have proposed that private sector employees contribute through payroll deductions to Secure Choice Pension programs. These programs would be managed by professionals and no employer contributions would be mandated. IRAs are not subject to ERISA, but, because these new pension programs involve payroll deductions, questions have surfaced as to whether these new initiatives would be subject to ERISA – thus creating potential oversight and regulatory burdens for employers.
For their part, the states have argued that fiduciary responsibility does not need ERISA’s oversight. They say the regulatory and fiduciary responsibilities could be assumed by the boards governing the plans and by the third-party financial services companies hired to run them – not the employers who make the plans available to their workers. The Department of Labor is concerned about allowing plans to move ahead without ERISA’S involvement in them. The Department has always defined its role under ERISA as regulating the employers who offer retirement savings plans. The new Secure Choice Pension options would require the Department to shift their oversight from the employers to the financial service providers, meaning that employers won’t be considered fiduciaries because they participate in the pension plans.
All indications suggest that President Obama wants to see new initiatives in place by the time he leaves office. Many business owners and their employees are hoping this timetable is doable in order to provide much needed help for workers struggling to save for retirement.
Sam J. Adams CPA
10440 N. Central Expwy., Suite 650
Dallas, TX 75231