Senate HELP Subcommittee Roundtable on Retirement Plan Options for Small Businesses
Senate Health, Education, Labor & Pensions Subcommittee on Primary Health and Retirement Security
“Retirement Plan Options for Small Businesses”
Wednesday, October 28, 2015
Key Topics & Takeaways
- Model MEP Design: Principal’s Schoening noted his support for Prudential’s model MEP design found in the white paper released this year, noting that it offers the “greatest opportunity to appeal to the broadest set of employers.”
- Regulatory Changes: Static Peak’s Anderson stressed that a mandatory requirement “may not fit for everyone,” and offered the following regulatory changes: 1) eliminate top heavy rules; 2) eliminate discrimination testing; and 3) streamline requirements and allow for greater use of electronic disclosures
- Electronic Delivery: Anderson stated the need for the DOL to change its electronic delivery standard and encourage the use of it, also allowing plan sponsors to delivery electronically. AARP’s Certner countered that while background information can be delivered electronically, critical pension benefit information should still be delivered traditionally as “people still like the paper option.”
- Federal Solution: Prudential’s Kalamarides stressed the need for a federal solution “beyond what the states are doing,” restating the fact that the small business demand for retirement plans will increase 250% if the burdens of cost, administrative hassle and fiduciary responsibilities are eliminated.
Witnesses
- Scott Anderson, Owner, Static Peak, LLC; Member Board of Directors, U.S. Chamber of Commerce
- Lance Schoening, Member, Board of Directors, American Benefits Council; Director of Product Management, Principal Financial Group
- John J. Kalamarides, Senior Vice President of Institutional Investment Solutions, Prudential Retirement
- David Certner, Legislative Counsel and Legislative Policy Director, AARP
Opening Statements
In his opening statement, Chairman Michael Enzi (R-Wyo.) stated his consideration of expanding multiple employer plans (MEPs) to make it easier for small businesses to offer retirement plans. He noted the need for plans to be less intimidating, complicated, and expensive for small businesses, adding that the expansion of MEPs should meet these needs. Enzi recommended allowing employers to have Open MEPs, noting the strong bipartisan support for expanding MEPs.
Witness Testimony
Scott Anderson, Owner, Static Peak, LLC; Member Board of Directors, U.S. Chamber of Commerce
In his testimony, Scott Anderson stated that his small business is located in a small area with large turnover and that it is difficult to hire those in town, especially without incentives like retirement plans. He continued that small businesses that offer retirement plans help “attract and maintain” employees, and that while a number of the small businesses in his area do offer plans, “more want to do so.” Anderson stressed that the “hurdles” small and micro businesses face when developing retirement plans are costs and the administrative complexity of the plans.
Lance Schoening, Member, Board of Directors, American Benefits Council; Director of Product Management, Principal Financial Group
In his testimony, Lance Schoening stated that while innovations in the retirement plan space are “meeting the needs” of the market and industry firms, a “key challenge” is getting more small businesses to establish plans and have higher participation rates within existing plans. He noted that auto features are “significantly underutilized” for small businesses compared to larger ones, and stressed the need to “find ways to fix” the high percentage of employees that are not participating in retirement plans. Schoening discussed three ways to approach the retirement challenge: 1) supporting MEPs for unrelated employers; 2) establishing a more flexible, cost-effective safe harbor designed for small employers; and 3) creating “meaningful and targeted” tax incentives for those small businesses that offer plans with an auto feature.
John J. Kalamarides, Senior Vice President of Institutional Investment Solutions, Prudential Retirement
In his testimony, John Kalamarides stressed that plan coverage is the “critical gap” in creating financial security for employees, citing a study that found employees with workplace retirement plans save over 16 times more than employees without access to workplace plans. He noted that barriers to small businesses offering plans are cost, administrative “hassle” and fiduciary responsibilities, but that demand from small businesses would increase by 250 percent if the barriers were removed.
Kalamarides offered five changes to federal law: 1) allow unaffiliated businesses with separate employee groups to “pool” purchasing power; 2) reduce the liability imposed on small business owners to only fall on decisions owners make; 3) have the Internal Revenue Service (IRS) and Department of Labor (DOL) create a model plan that includes best practices and eliminates discrimination testing; 4) give the DOL enforcement capability; and 5) pass the Lifetime Income Disclosure Act (S.1317) offered by Sens. Johnny Isakson (R-Ga.) and Christopher Murphy (D-Conn.).
David Certner, Legislative Counsel and Legislative Policy Director, AARP
In his testimony, David Certner stated that while a few states have passed legislation with 20 other states considering passing state-run retirement plans, the federal level needs to develop Open MEPs and that this can “compliment” the state plans. He noted the need to avoid “burdening” small businesses with excessive requirements and allow auto options for employers. Certner offered the following standards that Open MEP models should have: 1) the employer in MEP duties should be clear; 2) it should meet minimum qualification requirements; 3) it should act in a fiduciary capacity; and (4) it should include basic consumer safe guards.
Certner stressed the need for clarity over whether the small employer or the MEP will be responsible for the plan and that the DOL has to have the authority to enforce and audit the MEPs. He continued that the easier plans are for small employers, the more likely they will choose a MEP or similar option for their business. Certner concluded that Congress should create a framework that ensures participants benefit from economies of scale and group pricing.
Roundtable Discussion
Recommendations for Congress
When asked for recommendations on how Congress can help give business owners access to plans, Kalamarides agreed with Certner and stressed the need for Congress to pass a bill under which separate employee groups are able to pool purchase power and allow Open MEPs. He continued that the IRS should create a model plan design that allows providers and MEPs to compete with each other based on price, investment performance and service. Kalamarides added that the Lifetime Income Disclosure Act is “critical” for financial security.
Schoening noted the different proposals from the bipartisan tax working group, Employee Retirement Income Security Act (ERISA) Advisory Council, Congressional offices, and industry groups. He noted his support for Prudential’s model MEP design found in the white paper released this year, noting that it offers the “greatest opportunity to appeal to the broadest set of employers.” Schoening stressed the importance of creating a safe harbor match formula that does not increase cost and a more targeted tax credit for those employers offering such features to offset the cost of the plans.
Anderson stated that the advantages of MEPs are the ability for small businesses to pool resources and the benefit of having one audit for the entire plan. However, he noted that the disadvantage of such plans is joint liability for qualification for those in the plan, which “turns employers off.” Anderson suggested enhancing the small business tax credit, as it is “too small and too short-lived,” and giving small businesses a “dedicated voice” on advisory councils.
Auto IRAs
Rep. Sheldon Whitehouse (R-R.I.) spoke of the legislation he sponsored, S.245, the Automatic IRA Act of 2015. He noted his desire for employers with 10 or more employees to be required to offer retirement plans, adding that it is “not a big expense.” Whitehouse stressed the importance of auto enrollment and noted that fiduciary liability should not fall on the employer.
Certner replied that an auto individual retirement account (IRA) is an approach he endorsed in the past and that a number of states are pursuing the idea. He continued that auto features are an “excellent addition” to the pension system, noting the ability to increase escalation annually.
Changing the Regulatory Structure
Anderson stressed that a mandatory requirement “may not fit for everyone,” and offered the following regulatory changes: 1) eliminate top heavy rules; 2) eliminate discrimination testing; and 3) streamline requirements and allow for greater use of electronic disclosures.
Kalamarides noted the many recommendations and bills focused on Open MEPs and simplification, adding the importance of amendments to safe harbor plans, the portability of lifetime income, eliminating top heavy rules and “easy” restrictions on electronic communication.
Schoening agreed with the other panelists, adding that he “cannot understate the value of the voluntary retirement system in place today.”
Certner noted that trying to improve the pension coverage under a voluntary system is not working and stressed the need for a requirement for employers to engage, suggesting taking money out of employee paychecks “before they see it.”
Data Collection
When asked how data can be collected without placing “unnecessary burdens” on small businesses, Kalamarides offered three items that would be helpful: 1) a model plan design that takes away the variability normally reported; 2) MEPs registering with the DOL; and 3) MEPs filing an annual report with a list of participating employers so the Department can hold employers responsible.
Schoening suggested applying concepts from Prudential’s white paper to the MEP plan sponsor, adding that protections that work well in the single employer space can also work in the MEP space.
ElectronicDelivery
Anderson noted the importance of regulators knowing the benefits that come from electronic delivery, adding the need to create a simple, and uniform disclosure standard. He continued with the need for the DOL to change its electronic delivery standard and encourage the use of it, also allowing plan sponsors to delivery electronically.
Certner stated that while background information can be delivered electronically, critical pension benefit information should still be delivered traditionally as “people still like the paper option.”
Next Steps
Kalamarides stressed the need for a federal solution “beyond what the states are doing,” restating the fact that the small business demand for retirement plans will increase 250% if the burdens of cost, administrative hassle and fiduciary responsibilities are eliminated.
Schoening agreed with Kalamarides and added that he is “ready for a legislative package” that includes the ideas mentioned.
Tax Credits
Schoening recommended targeted tax credits for those associated with plans with “progressive” auto features with an auto default deferral at 6 percent or higher, in addition to an additional credit for small businesses that sponsor a retirement plan the first time. Certner added that tax incentives help encourage businesses to participate, and Kalamarides noted that the tax credit would allow businesses to match contributions. Anderson agreed, adding that “any tool you can put in the box to incentivize behavior helps.”
State Efforts Vs. MEPs
When asked if MEPs would be a better option than current state-led efforts, Certner explained that the MEPs would be “another option on the table,” but that he is not sure what option is best.
Kalamarides noted that states have taken action because “they see the [retirement] situation as dire,” but noted the differences between Open MEPs and IRAs, such as protections under ERISA, fiduciary rules associated with ERISA, and the ability for employers to offer a match or have auto features with MEPs. He added that portability is a problem with state plans and stressed that there is “absolutely” a need for a federal solution.
Schoening echoed Kalamarides and stated that auto IRAs do not have the same benefits as MEPs.
Anderson noted that while a MEP may not be perfect for every business, it “should be on the table.”
For more information on this event, please click here.
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Senate Health, Education, Labor & Pensions Subcommittee on Primary Health and Retirement Security
“Retirement Plan Options for Small Businesses”
Wednesday, October 28, 2015
Key Topics & Takeaways
- Model MEP Design: Principal’s Schoening noted his support for Prudential’s model MEP design found in the white paper released this year, noting that it offers the “greatest opportunity to appeal to the broadest set of employers.”
- Regulatory Changes: Static Peak’s Anderson stressed that a mandatory requirement “may not fit for everyone,” and offered the following regulatory changes: 1) eliminate top heavy rules; 2) eliminate discrimination testing; and 3) streamline requirements and allow for greater use of electronic disclosures
- Electronic Delivery: Anderson stated the need for the DOL to change its electronic delivery standard and encourage the use of it, also allowing plan sponsors to delivery electronically. AARP’s Certner countered that while background information can be delivered electronically, critical pension benefit information should still be delivered traditionally as “people still like the paper option.”
- Federal Solution: Prudential’s Kalamarides stressed the need for a federal solution “beyond what the states are doing,” restating the fact that the small business demand for retirement plans will increase 250% if the burdens of cost, administrative hassle and fiduciary responsibilities are eliminated.
Witnesses
- Scott Anderson, Owner, Static Peak, LLC; Member Board of Directors, U.S. Chamber of Commerce
- Lance Schoening, Member, Board of Directors, American Benefits Council; Director of Product Management, Principal Financial Group
- John J. Kalamarides, Senior Vice President of Institutional Investment Solutions, Prudential Retirement
- David Certner, Legislative Counsel and Legislative Policy Director, AARP
Opening Statements
In his opening statement, Chairman Michael Enzi (R-Wyo.) stated his consideration of expanding multiple employer plans (MEPs) to make it easier for small businesses to offer retirement plans. He noted the need for plans to be less intimidating, complicated, and expensive for small businesses, adding that the expansion of MEPs should meet these needs. Enzi recommended allowing employers to have Open MEPs, noting the strong bipartisan support for expanding MEPs.
Witness Testimony
Scott Anderson, Owner, Static Peak, LLC; Member Board of Directors, U.S. Chamber of Commerce
In his testimony, Scott Anderson stated that his small business is located in a small area with large turnover and that it is difficult to hire those in town, especially without incentives like retirement plans. He continued that small businesses that offer retirement plans help “attract and maintain” employees, and that while a number of the small businesses in his area do offer plans, “more want to do so.” Anderson stressed that the “hurdles” small and micro businesses face when developing retirement plans are costs and the administrative complexity of the plans.
Lance Schoening, Member, Board of Directors, American Benefits Council; Director of Product Management, Principal Financial Group
In his testimony, Lance Schoening stated that while innovations in the retirement plan space are “meeting the needs” of the market and industry firms, a “key challenge” is getting more small businesses to establish plans and have higher participation rates within existing plans. He noted that auto features are “significantly underutilized” for small businesses compared to larger ones, and stressed the need to “find ways to fix” the high percentage of employees that are not participating in retirement plans. Schoening discussed three ways to approach the retirement challenge: 1) supporting MEPs for unrelated employers; 2) establishing a more flexible, cost-effective safe harbor designed for small employers; and 3) creating “meaningful and targeted” tax incentives for those small businesses that offer plans with an auto feature.
John J. Kalamarides, Senior Vice President of Institutional Investment Solutions, Prudential Retirement
In his testimony, John Kalamarides stressed that plan coverage is the “critical gap” in creating financial security for employees, citing a study that found employees with workplace retirement plans save over 16 times more than employees without access to workplace plans. He noted that barriers to small businesses offering plans are cost, administrative “hassle” and fiduciary responsibilities, but that demand from small businesses would increase by 250 percent if the barriers were removed.
Kalamarides offered five changes to federal law: 1) allow unaffiliated businesses with separate employee groups to “pool” purchasing power; 2) reduce the liability imposed on small business owners to only fall on decisions owners make; 3) have the Internal Revenue Service (IRS) and Department of Labor (DOL) create a model plan that includes best practices and eliminates discrimination testing; 4) give the DOL enforcement capability; and 5) pass the Lifetime Income Disclosure Act (S.1317) offered by Sens. Johnny Isakson (R-Ga.) and Christopher Murphy (D-Conn.).
David Certner, Legislative Counsel and Legislative Policy Director, AARP
In his testimony, David Certner stated that while a few states have passed legislation with 20 other states considering passing state-run retirement plans, the federal level needs to develop Open MEPs and that this can “compliment” the state plans. He noted the need to avoid “burdening” small businesses with excessive requirements and allow auto options for employers. Certner offered the following standards that Open MEP models should have: 1) the employer in MEP duties should be clear; 2) it should meet minimum qualification requirements; 3) it should act in a fiduciary capacity; and (4) it should include basic consumer safe guards.
Certner stressed the need for clarity over whether the small employer or the MEP will be responsible for the plan and that the DOL has to have the authority to enforce and audit the MEPs. He continued that the easier plans are for small employers, the more likely they will choose a MEP or similar option for their business. Certner concluded that Congress should create a framework that ensures participants benefit from economies of scale and group pricing.
Roundtable Discussion
Recommendations for Congress
When asked for recommendations on how Congress can help give business owners access to plans, Kalamarides agreed with Certner and stressed the need for Congress to pass a bill under which separate employee groups are able to pool purchase power and allow Open MEPs. He continued that the IRS should create a model plan design that allows providers and MEPs to compete with each other based on price, investment performance and service. Kalamarides added that the Lifetime Income Disclosure Act is “critical” for financial security.
Schoening noted the different proposals from the bipartisan tax working group, Employee Retirement Income Security Act (ERISA) Advisory Council, Congressional offices, and industry groups. He noted his support for Prudential’s model MEP design found in the white paper released this year, noting that it offers the “greatest opportunity to appeal to the broadest set of employers.” Schoening stressed the importance of creating a safe harbor match formula that does not increase cost and a more targeted tax credit for those employers offering such features to offset the cost of the plans.
Anderson stated that the advantages of MEPs are the ability for small businesses to pool resources and the benefit of having one audit for the entire plan. However, he noted that the disadvantage of such plans is joint liability for qualification for those in the plan, which “turns employers off.” Anderson suggested enhancing the small business tax credit, as it is “too small and too short-lived,” and giving small businesses a “dedicated voice” on advisory councils.
Auto IRAs
Rep. Sheldon Whitehouse (R-R.I.) spoke of the legislation he sponsored, S.245, the Automatic IRA Act of 2015. He noted his desire for employers with 10 or more employees to be required to offer retirement plans, adding that it is “not a big expense.” Whitehouse stressed the importance of auto enrollment and noted that fiduciary liability should not fall on the employer.
Certner replied that an auto individual retirement account (IRA) is an approach he endorsed in the past and that a number of states are pursuing the idea. He continued that auto features are an “excellent addition” to the pension system, noting the ability to increase escalation annually.
Changing the Regulatory Structure
Anderson stressed that a mandatory requirement “may not fit for everyone,” and offered the following regulatory changes: 1) eliminate top heavy rules; 2) eliminate discrimination testing; and 3) streamline requirements and allow for greater use of electronic disclosures.
Kalamarides noted the many recommendations and bills focused on Open MEPs and simplification, adding the importance of amendments to safe harbor plans, the portability of lifetime income, eliminating top heavy rules and “easy” restrictions on electronic communication.
Schoening agreed with the other panelists, adding that he “cannot understate the value of the voluntary retirement system in place today.”
Certner noted that trying to improve the pension coverage under a voluntary system is not working and stressed the need for a requirement for employers to engage, suggesting taking money out of employee paychecks “before they see it.”
Data Collection
When asked how data can be collected without placing “unnecessary burdens” on small businesses, Kalamarides offered three items that would be helpful: 1) a model plan design that takes away the variability normally reported; 2) MEPs registering with the DOL; and 3) MEPs filing an annual report with a list of participating employers so the Department can hold employers responsible.
Schoening suggested applying concepts from Prudential’s white paper to the MEP plan sponsor, adding that protections that work well in the single employer space can also work in the MEP space.
ElectronicDelivery
Anderson noted the importance of regulators knowing the benefits that come from electronic delivery, adding the need to create a simple, and uniform disclosure standard. He continued with the need for the DOL to change its electronic delivery standard and encourage the use of it, also allowing plan sponsors to delivery electronically.
Certner stated that while background information can be delivered electronically, critical pension benefit information should still be delivered traditionally as “people still like the paper option.”
Next Steps
Kalamarides stressed the need for a federal solution “beyond what the states are doing,” restating the fact that the small business demand for retirement plans will increase 250% if the burdens of cost, administrative hassle and fiduciary responsibilities are eliminated.
Schoening agreed with Kalamarides and added that he is “ready for a legislative package” that includes the ideas mentioned.
Tax Credits
Schoening recommended targeted tax credits for those associated with plans with “progressive” auto features with an auto default deferral at 6 percent or higher, in addition to an additional credit for small businesses that sponsor a retirement plan the first time. Certner added that tax incentives help encourage businesses to participate, and Kalamarides noted that the tax credit would allow businesses to match contributions. Anderson agreed, adding that “any tool you can put in the box to incentivize behavior helps.”
State Efforts Vs. MEPs
When asked if MEPs would be a better option than current state-led efforts, Certner explained that the MEPs would be “another option on the table,” but that he is not sure what option is best.
Kalamarides noted that states have taken action because “they see the [retirement] situation as dire,” but noted the differences between Open MEPs and IRAs, such as protections under ERISA, fiduciary rules associated with ERISA, and the ability for employers to offer a match or have auto features with MEPs. He added that portability is a problem with state plans and stressed that there is “absolutely” a need for a federal solution.
Schoening echoed Kalamarides and stated that auto IRAs do not have the same benefits as MEPs.
Anderson noted that while a MEP may not be perfect for every business, it “should be on the table.”
For more information on this event, please click here.