A retirement plan mandate: not as scary as it sounds

A recent legislative proposal would require virtually all employers to offer a retirement plan starting as soon as 2023. The good news is that, not only would this requirement significantly improve retirement readiness for millions of employees, it is also likely to be considerably easier and less expensive for employers to comply with than many realize.

To put the proposal into perspective, it is helpful to look at the experience of countries that have already introduced similar measures. For example, starting in 2012, the UK rolled out a requirement for all employers, regardless of size, to automatically enroll workers in a retirement plan. As a result, the percentage of private sector workers contributing to a retirement plan leaped from 42% in 2012 to 86% in 2019. This increase in coverage was even more notable among groups that have typically lacked coverage, such as low-earners, part-time workers and those employed by micro-employers.

For this type of program to be successful, it needs to be easy for employers to comply with. US legislators have already laid the groundwork for this by introducing new pooled retirement plans such as Pooled Employer Plans (PEPs) or Groups of Plans (GOPs). Rather than requiring each employer to set up their own plan, pooled plans allow large numbers of small employers to group together to use the same retirement plan. This way, they can achieve some of the economies of scale traditionally only available to much larger plan sponsors. Employers can also outsource most of the fiduciary and administrative responsibilities associated with offering a retirement plan.

Technology also has a key role to play both in controlling costs and making it simple for small employers to set up and run a plan. In the UK, a number of commercial Master Trusts (the UK version of a PEP) emerged with a technology-first approach to providing cost-effective solutions for small employers. Our Master Trust is one of these, and to gain more insights into the real life experience of offering a retirement plan for small employers, we recently conducted a survey of over 800 employers that use this platform.

Encouragingly, the clear majority of surveyed employers described the experience of offering a retirement plan as “easy”, “relatively easy” or “part of the regular payroll routine.” Ninety-four percent of employers with under 10 employees and 85% of those with 10 – 25 employees reported spending an hour or less on administering their plan each month. Across the board, the smaller the employer, the easier they found it to offer a plan. This is presumably due to the fact that they have a smaller and less complex workforce compared to larger employers. Only 8% of the surveyed employers described offering a retirement plan as a “significant burden.”

The US proposal is even less demanding for employers than the UK system. Unlike the US proposal, where employer contributions are voluntary, the UK requires employers to make a 3% matching contribution provided that employees do not opt out.

Apart from the fact that employer contributions would be voluntary, US employers would also be eligible for generous tax credits to offset the cost of setting up a plan. For employers with fewer than 25 employees, this credit could cover as much as 100% of their cost of setting up a plan for the first five years.

While incentives for employers to voluntarily offer plans are helpful, it is clear that a significant increase in coverage will not happen unless employers are required to automatically enroll their employees in a plan.The good news is that, thanks to the new pooled retirement plans and modern technology, it is currently possible to offer cost-effective retirement plans that are very easy to administer for even the smallest employers.

Based on the UK experience, even the smallest of employers should feel confident in the ease of ability to comply with the proposed legislation. Even better, millions of Americans should feel confident that it would dramatically increase access to retirement plan participation and savings and represent a quantum leap in improving retirement security.

Catherine Reilly is the Director of Retirement Solutions at Smart. Prior, Catherine was Global Head of Research for the defined contribution team at State Street, responsible for thought leadership and strategic development. Previously, she was Chief Economist of Pohjola Asset Management in Finland ($40 billion assets under management) and a Management Consultant at McKinsey & Co., Inc in the Helsinki office. Catherine is a CFA charter holder.