Everything you need to know about Trump’s new retirement security executive order

Everything you need to know about Trump’s new retirement security executive order

We’ve been saying it for years—in order to advance American workers’ retirement security in a major, tangible manner, the government probably needs to intervene in one way or another. The conversation began years ago with state-mandated auto IRAs and recently turned to Multiple Employer Plans (MEPs) and Required Minimum Distribution (RMD) regulations when President Donald Trump signed a new executive order aimed at enhancing retirement security in America.

At the time of signing, Trump said, “We believe all Americans should be able to retire with the confidence, dignity, and economic security that you want.” [1] That sounds like a goal we can all get behind, but the inner workings of the executive order aren’t quite so cut and dry. The details are highly technical, making it hard for those outside of the retirement landscape to truly understand the potential benefits and downfalls. But that’s what we’re here for.

What the Trump retirement security executive order really means

Essentially, the new retirement security executive order signed by Trump calls for the Department of Labor and the Department of Treasury to look into two key aspects of the retirement industry:

  1. Raising the age when people with certain types of retirement plans are required to begin taking annual distributions

  2. Analyzing whether Multiple Employer Plans would make sponsoring a retirement plan easier for small businesses and small business owners

But why those two components, and why now? Let’s break it down.

Raising the age of retirement Required Minimum Distributions

As it stands today, retired workers with a traditional IRA or 401(k) must begin taking distributions from their retirement plan when they reach age 70 ½ unless they are still working. If they are still working, they aren’t required to take distributions from their current employer’s plan. This is important because statistics show that RMD regulations are a huge factor in IRA withdrawals. In fact, with only 6.2 percent of Roth IRA owners aged 71-79 choosing to take a distribution (since RMDs aren’t a factor in Roth IRA regulations), while 85.4 percent of traditional IRA owners took a withdrawal—likely due to RMD rules—many wonder if the guidelines force unnecessary withdrawals to be made, leaving retirees with insufficient savings as they grow older [2].

Trump’s executive order aims to solve this issue by raising the age retirees must begin taking RMDs out of their plan. And the main argument for doing so: “Americans are living longer now than in the past.” [1]

Are we, though?

The National Center for Health Statistics reports that life expectancy in the United States has actually dropped for the second year in a row and warns that due to high volumes of drug-related deaths, we could see a declining life expectancy for the third year in a row—something that hasn’t happened since the Spanish flu epidemic hit 100 years ago [3].

While raising the RMD age may seem like a good idea at first glance (“Why require someone to start digging into their savings at age 70 ½ when they could potentially live for 30 (or more!) more years?”), industry experts have warned that such a change could actually lead to a lower quality of life among retirees who choose to delay collecting distributions. Additionally, lost revenue the government accumulates from RMDs could force the government to raise taxes in other ways to make up for the new deficit [1].

All that being said, RMD regulations aren’t exactly the main focus of the new executive order. Experts don’t expect the RMD conversation to be a very high priority proposal, mostly because the majority of Americans aren’t still working at age 70 ½ [1]. And those that are aren’t required to take distributions from the plan where they currently work. The bigger (and perhaps, more controversial) aspect of the retirement security executive order comes in the form of Multiple Employer Plans, or MEPs.

What is a Multiple Employer Plan?

By definition, an open Multiple Employer Plan is “a single plan adopted by two or more unrelated employers. It’s a tax-qualified program, typically a 401(k), that meets all the requirements of the Employee Retirement Income Security Act (ERISA), a federal law that sets minimum standards for retirement plans in private industries and protects their assets.” [4]

Did you get all that?

In layman’s terms, a MEP is one, single retirement plan shared among multiple different employers—usually small businesses that band together to help save on plan administration fees and other costs associated with sponsoring a retirement plan. The idea behind MEPs is relatively simple: an alternative to a traditional retirement plan that is more attainable and affordable for small businesses.

And we agree, small businesses often fall behind in the retirement landscape—beginning with accessibility. Statistics have consistently shown for more than 40 years that about half of workers in the private sector, or approximately 55 million people, don’t have access to an employer-sponsored savings plan [5]. And that’s a big problem because we know that workers are 15 times more likely to save for their retirement if they can save through an employer-based plan [6].

So what’s the hesitation when it comes to small businesses and offering a 401(k) or similar retirement plan? Employers often cite expenses, limited resources, and lack of employee interest among the top reasons for not offering a retirement plan [7]. And there’s one emerging trend in the retirement landscape that’s marketed as a saving grace to these three concerns.

Enter MEPs.

Potential benefits of MEPs

MEPs are said to help cut costs for the plan sponsor by obtaining lower investment and administrative fees, give access to more sophisticated investment options, offer a simplified process for enrolling, and limit fiduciary responsibilities for the plan sponsor [8]. They offer flexible design, allowing for matching employer contributions and higher overall contribution limits than IRA programs, but perhaps the biggest selling point of MEPs is the lower cost. According to the Center for Retirement Initiatives, all open MEP assets are pooled to pay the benefits and cover the cost of the plan—saving small businesses money thanks to economies of scale [8].

However, the idea that small employers cannot find or provide low-cost retirement plans to employees in this day and age is almost laughable. It’s a myth perpetuated by small business owners who haven’t had the time or don’t care enough to look into all the retirement savings options that are available today.

And maybe the idea of pooling resources together with other small businesses in order negotiate better pricing with providers would’ve made sense in the past when index funds didn’t exist and hidden fees ran rampant, but today, low-cost plans are available to all employers—regardless of size. In fact, providers that specialize in small business retirement plans offer affordable options for even owner-only businesses.

Hidden issues with Multiple Employer Plans

In reality, MEPs are much more complicated than a simple agreement to join forces with other small businesses in an effort to save on costs and fiduciary responsibilities. Because assets in MEPs essentially co-mingle with assets from hundreds of other employees working for multiple different employers, complex administration is almost always involved. And that can bring about some seriously sticky situations. There’s a reason the Department of Labor has historically discouraged unrelated businesses from collaborating on MEPs after all; the potential for abuse is extremely high [10].

Take the case of Matt Hutcheson, for example. Hutcheson, an Idaho-based fiduciary to several Multiple Employer Plans, was seemingly trusted by his clients and by Congress alike—testifying in front of Congress to preach the importance of fiduciary responsibilities and essentially becoming the face of the fiduciary movement in the early 2010’s. Until he was convicted of stealing millions of dollars in assets from the plans, that is. And that’s not even the scariest part; he got away with it over the course of two years before he was finally caught [9]. And if someone on Congress’s radar can get away with such extreme fraud for such an extended period of time, who’s to say it can’t (and won’t) happen again?

Small business owners quite frankly don’t have the time to monitor all aspects of their retirement plan, and things get a little dicey when participants from multiple different employers are essentially eating from the same pot.

What we’re getting at is this: MEPs claim to provide a solution for problems that don’t really exist. Today, even start-up retirement plans with no assets have options for accessing low-cost investments and investment education. Additionally, advancing technology has made sponsoring a retirement plan much more automated, with features like payroll-deducted contributions, automatic enrollment, and automatic escalation available to help get participants engaged from the get-go.

Furthermore, we aren’t sure MEPs could even accomplish what they’re setting out to do: close the coverage gap.

Can Multiple Employer Plans solve the coverage gap?

Alicia Munnell, director of the Center for Retirement Research at Boston College, told Forbes in an interview shortly after the retirement security executive order was signed that she wonders how many small businesses would actually begin offering a retirement plan to employees if MEPs made it easier to do. She also said she’s uncertain that MEPs are the solution to the coverage gap that small business employees face when it comes to retirement plans [1].

Instead, perhaps the Trump administration should turn its attention to state-mandated auto-IRA programs that have already proven to be successful. Take Oregon for example. The state’s auto-IRA program was the first to go live in January 2017 and has already accumulated more than $3 million in savings and has a 70 percent participation rate among eligible employees [11]. And experts agree that state and city auto-IRA programs would likely close the coverage gap to a much greater extent than MEPs as it is [11].

That being said, while an open MEP or state-auto IRA may present the perfect opportunity to test the small business retirement plan waters, a 401(k) program will likely yield the best saving results among employees and owners alike. Contribution limits are higher, the plans allow for flexibility to fit a variety of business needs, and affordable options are available for businesses of all size.

Consider the benefits of 401(k) retirement plans before deciding to jump on the risky bandwagon of open MEPs or waiting for a state-auto IRA initiative to commence in your state. Increase employee retention, attract new talented prospects, and most importantly, show your employees you care about their future by offering a retirement savings plan and helping them own their retirement readiness.