State Street Global Advisors (SSGA) has issued a white paper and an open letter to Congress calling for mandatory defined contribution (DC) plans among all private-sector businesses.
In the paper, “Moving the Coverage Needle: Towards a national framework to address retirement access and coverage,” SSGA applauds efforts by the president, Congress and the states to offer retirement plans—but says that the resulting “disparate patchwork of proposed solutions fails to truly address the issue at hand.”
More than one-third of full-time, private-sector workers—30 million individuals and nearly 40 million working households—do not have access to a retirement savings plan, SSGA notes. Among small employers, those with 100 employees or less, that rises to nearly half, 47%, that have no retirement plan, which is very disconcerting since small businesses are the fastest-growing segment of the economy, according to SSGA.
“Today, we face an access imperative,” says Ron O’Hanley, president and CEO of SSGA, in his letter to Congress. “We applaud efforts by the White House, Congress and many states to expand workplace retirement savings opportunities through auto-IRAs [individual retirement accounts] and open MEPs [Multiple Employer Plans]. However, discrete initiatives will lead to a complex and inefficient set of retirement savings programs that could lead to a lower savings level. It’s time for a national, bipartisan solution that guarantees workplace coverage in a retirement savings plan.”
Because IRAs generally have no company matches, they can result in lower savings balances compared with 401(k)s, SSGA argues. In addition, they lack the fiduciary protections of the Employee Retirement Income Security Act (ERISA). For these reasons, SSGA feels the states should be mindful to implement best practices of DC plans. Ideally this would start with a federal law requiring all employers to create a retirement savings plan and automatically enroll participants, including part-time workers, at 6%, O’Hanley says. Deferrals would increase by 2% each year over a period of three years up to 12%, with the option of raising cap that even higher.
The plans would not require employers to offer a match, SSGA says, but the government could offer tax credits to small employers, those with 100 employees or less, that do so. In addition, SSGA would like the law to offer plan tax credits for small employers. The plans would defer participants’ assets into an appropriate qualified default investment alternative (QDIA), as mandated by the Pension Protection Act, compared to recommendations for many of the state proposals and federal auto-IRAs, which embrace low-yield strategies or expensive principal-protection vehicles, SSGA says.
NEXT: Multiple-employer plans
SSGA would also like to make MEPs, which are less expensive to run than individual 401(k) plans since they share administrative costs, "more accessible by eliminating the 'nexus' requirement that requires an affiliation among employers—and the 'one bad apple' rule that would disqualify an entire MEP if one employer engages in a disqualifying event.”
SSGA thinks there should be some exceptions to these requirements, specifically companies that have been in business for less than three years and participants in their first year of employment. Churches and governments would also not be required to offer a retirement plan.
The white paper concludes that the mandatory retirement savings plan law, together with open MEPs, enhanced tax credits and the adoption of the automatic enrollment and escalation features, will expand retirement plan coverage exponentially. In fact, the Employee Benefit Research Institute (EBRI) analyzed SSGA’s proposal and estimates it could reduce the expected retirement savings shortfall by as much as $740 billion.
SSGA proposes that Congress schedule a coverage summit in Washington to discuss these ideas. SSGA’s “Moving the Coverage Needle” white paper can be downloaded here.