I will make a less than bold prediction: Ten years from now, the 401(k) landscape will look drastically different than it does today. It is no secret that a great many employees do not have access to a corporate retirement plan. Some studies put that number around 55 million people. There are many reasons why access has been elusive, but the reasons are not an issue here; it is the solution to this problem that is at the heart of this article. Legislation has begun to change the landscape. It will continue to evolve so that the retirement income gap can be addressed in a meaningful way.
Revolutions tend to take shape as organized movements aimed at affecting change. In this context, it is economic change. In December 2019, a sweeping piece of legislation known as the SECURE ACT (Setting Every Community Up for Retirement Enhancement) was signed into law with massive bipartisan support. The spirit of the bill is to provide retirement plan access to those tens of millions of Americans who do not currently have it. There were dozens of meaningful retirement reforms in this bill that ranged from the ability to delay required minimum distributions to age 72 to making it a requirement to have inherited IRAs distributed in 10 years, to providing credits covering startup costs for 401(k) plans, to the creation of the newest retirement plan structure called the Pooled Employer Plan (PEP). We believe that the PEP may be the most impactful of all.
In practice, there is nothing simple about establishing a PEP at the onset. Still, there is a great deal of simplicity in the PEP solution for employers. In its purest form, the PEP solution is designed to create a single plan with many adopting employers. These employers join together to provide a competitively priced 401(k) plan while offering employers the ability to outsource nearly all of the operational and administrative fiduciary responsibilities to a third party. PEPs allow an employer to focus on their business while offering a highly competitive 401(k) plan to their employees and having the comfort in knowing that the fiduciary responsibilities under ERISA are being met. This solution can be a great benefit to employers who do not have the size to negotiate reasonable fees and services on their own, have limited resources to dedicate to their retirement plan but do want a solution that helps attract and retain quality employees.
All things evolve. Darwin studied biological evolution back in the 1800s through natural selection. Species most suited to their environment would survive and thrive; those that didn’t perished. Just like nature, processes and procedures evolve or perish. The retirement plan industry has a history of progressing to survive the changing saving landscape. When 401(k)s began, employees were expected to be investment experts and build their own portfolios. Then we created risk-based portfolios as investment options. We have target-date funds that put employees in a portfolio with a “glidepath” to retirement. We’ve recently created the ability to design custom target-date solutions that best fit an employer’s demographic. This PEP consortium solution is the next evolution, but this addresses the employer’s needs. Employers are not ERISA experts; they are generally entrepreneurs who have taken risks and invested in building a successful business and wanting to hire quality people to effectively grow that business. We’ve asked them to toe the line of ERISA law, of which they have no great knowledge. A PEP solution will relieve them of this responsibly and allow them and their staff to focus almost exclusively on continuing to grow their business.
SECURE ACT 2.0 is around the corner. Whispers in the industry say this next round could usher in regulations that mandate all employers establish a company-sponsored retirement plan, regardless of size. The solution may be to partner with a state-run IRA program, SIMPLE IRAs, or, more likely, a company-sponsored 401(k) plan. It is estimated that this pooled arrangement could create between 600,000 and 700,000 retirement plans nationally. If it doesn’t happen now, it will happen soon as fewer and fewer people believe social security will exist in its current form when they retire. I believe this is the first step of the revolution that will create substantial evolution in the 401(k)-plan industry for years to come. It just may be what everyone needs to close the retirement income gap and allow more employees to retire with sufficient savings and the dignity that comes with it.
Securities offered through M Holdings Securities, Inc., a Registered Broker/Dealer, Member FINRA/SIPC. Investment Advisory Services offered through Cornerstone Advisors Asset Management, LLC, independently owned and operated.
