On August 31, 2018, President Donald Trump issued an executive order on “Strengthening Retirement Security in America.” The executive order is likely setting the table for the Department of Labor (DOL) and the Department of the Treasury (IRS) to release proposed regulations in the not too distant future. The order asks the DOL and treasury department to consider changes geared toward encouraging the establishment of retirement plans by small and mid-size employers. Specifically, the executive order provides directives that would encourage smaller employers to offer retirement plans by participating in multiple employer plans (MEPs) and by simplifying the notice requirements (and the administrative burden associated with them) for employers sponsoring workplace retirement plans. It also suggests easing the required minimum distributions at age 70.5.
First, let’s take a glance at MEPs. A MEP is a single retirement plan that covers multiple employers that are not within the same controlled group. Expanding the availability of MEPs could potentially reduce costs and burdens for small and mid-size companies by allowing them to sign onto a plan that includes common recordkeeping, administration, and investment arrangements. Under the DOL’s current guidance, employers must have some form of relationship with one another, such as a degree of common ownership or historical associations, in order to participate in a common MEP. It is unclear whether the DOL and IRS have statutory leeway to allow “open MEPs” for unrelated employers under the applicable statutory language, but numerous bills in Congress could allow for open MEPs under some conditions.
The participant notification simplification efforts would seem to indicate that the IRS and DOL are both reviewing their current requirements to find ways to make notices less burdensome, both in content and delivery. One of the potential changes would be to liberalize the rules for providing notices electronically to participants. Present rules generally limit the use of email and other electronic disclosures to those employees who are able to access the disclosure materials electronically at work or who have specifically opted into electronic disclosures.
The collective effectiveness of the executive order to encourage new plan formation and cover more American workers certainly depends on the structure of tax incentives, but an “open MEP” concept could prove to be a great long-term solution for smaller employers and their participants. Many small employers shun plan formation due to cost, fiduciary, and administrative burdens. Furthermore, those who do start plans often place the cost on participants through the use of high-priced investment vehicles to compensate service providers and investment advisors. Fee structures for small-employer retirement plans are usually much higher for participants than their counterparts with larger employers. Open MEPs, if structured properly, could provide economies of scale and will be supported by retirement-centric fee-based advisors who will work to deliver high-quality, cost-effective programs similar to those maintained by larger employers.
Naturally, the executive order has generated substantial press attention, but what does it mean? What the executive order likely indicates is that the initiatives captured within the order have been under review for some time by the executive agencies. The executive branch may also consider working with Congress to move desired policies forward, as both the House and the Senate have introduced bipartisan legislation with similar intent to the executive order.
On September 10th, House Ways and Means Committee Chairman Kevin Brady released the details of his “tax reform 2.0” legislation, and it includes significant changes to retirement savings options, including the enhancement of MEPs. The package consists of three bills that seek to build on the Tax Cuts and Jobs Act by making certain individual and small business tax cuts permanent, simplifying existing rules to make it easier to save for retirement, and promoting new business innovation. One of the bills, H.R. 6757, mirrors the themes included in the bipartisan Retirement Enhancement and Savings Act (RESA) that was introduced this past spring. RESA includes several provisions that, taken together, will make it easier for small businesses to adopt and maintain a workplace retirement plan.
The bottom line is that the remainder of 2018 and 2019 are likely to provide some meaningful changes for current retirement plan sponsors (and potential new sponsors) to chew on moving forward. Where there is smoke, there is fire, and there’s plenty of smoke in Congress and the executive branch surrounding the retirement security of Americans. Stay tuned.