You can take it with you: The portable retirement benefit for small employers

Fifty years ago, the 401(k) plan was created as a supplemental plan to a pension. They were initially used by large corporations and were never meant to be a one-size-fits-all solution for the entire US workforce.

Fast forward 50 years: Today most businesses can’t offer a 401(k) plan. The cost to offer a plan is too high, and there is an excessive amount of regulatory complexity, and the liability that comes with being a fiduciary. For employers that do make the leap to offer a 401(k), they are often faced with complex regulatory requirements, and realize after the fact, that they’re saddled with the hidden costs of audits and other fiduciary requirements.  And if you’re a small or mid-size employer, your employees will pay about double the cost to invest, since investment fees for smaller 401(k) plans are about double.

The result of all of this is that 81 million people in the US don’t have access to a retirement plan. The problem has become so extreme that many states are now mandating employers must offer a retirement savings plan to their employees.

The 401(k) industry created multiple employer plans (MEPs) for providers to pool several small businesses into one 401(k) so that it has more assets (i.e. money) to manage. However, the lack of power individual employers have within an MEP adds a complication. Once an employer signs up, their employees are in the plan until the plan itself is dissolved or the employee leaves the company. That’s because participating companies do not have the right to individually terminate. This has led to hundreds of thousands of dollars of assets being held hostage from employees who want to move their assets elsewhere.

Liability risk on employers

Offering a 401(k) makes an employer a fiduciary to their employees. This designation places a liability risk on employers— employees can sue their employer for a breach of fiduciary duty.

As a fiduciary the employer is responsible for running the plan in the best interest of employees. Some companies hire a service provider to share some of the fiduciary functions. But the fiduciary responsibility can never be fully outsourced or removed—it can only be shared.

The important issue to note is that: if the employer doesn’t meet their fiduciary responsibility they are legally liable and can be sued by their employees. Over the past 10 years there has been a dramatic increase in the number of fiduciary lawsuits for reasons of: excessive fees, poor fund choices, and other failures.

The good news: there’s been an explosion of innovation in the retirement industry. There are new solutions that are available to small, medium and large sized companies that can help their employees and remove the high cost and complexity from businesses.

The last decade has brought rapid innovation to banking, payment processing, and systems integration. These new technologies provide the components required to build a smarter and more efficient retirement savings solutions.

Related: Is employee demand behind the shift toward portable retirement plans?

Beyond technology, there are other design and product features required for a modern retirement savings plan including: low (transparent) fees, high quality funds, universal accessibility, holistic financial education, and support with personal finances.

Portable retirement plans

Portable retirement plans give employees the freedom and flexibility to save in a low-cost, easy-to-use, tax-deferred savings plan. And, unlike a 401(k) plan, there are no limits on who can use it. Everyone qualifies: full-time, part-time, independent contractors and gig workers.

For employers, portable retirement is the easiest, most affordable way to offer a retirement plan. This type of plan can be set up in minutes, removes the complexity and removes the need for plan testing and auditing. And because it’s fully automated, it’s also the most affordable.

The innovative unlock for both employees and employers is that portable retirement never requires a rollover. Seamless portability means that employers don’t have to worry about abandoned plans and employees don’t have to go through the hassle and expense of a rollover. 

Laurie Rowley is CEO and co-founder of Icon Savings.