Washington may be snowbound, but the White House and Department of Labor are still working. Last night, they pre-announced the President’s Budget proposals on retirement. In the clearest sign that the administration will continue to focus on these important but unfortunately not-urgent issues, the proposals move beyond administrative actions to include legislative proposals. Surprisingly, at least some might actually be enacted on a bipartisan basis.
The basic challenge in retirement security is that, if retirement savings don’t happen at the workplace, for most people they don’t happen at all. Unfortunately, federal law (the Employee Retirement Income Security Act of 1974, ERISA) assumed that employers would offer retirement plans even if doing so made the employer legally responsible if anything went wrong, financially responsible for making contributions, and made them hire lawyers and actuaries to file federal reports. ERISA’s unintended result was that most of those employers who had traditional pension plans are dropping them and that most employers decided not to offer anything at all. Furthermore, its focus on single-employer plans ignores the need for portability whenever someone changes jobs – or if their “employer” doesn’t want to act like an employer and doesn’t want to treat them as employees (e.g., Uber).
What’s necessary is to rethink ERISA and that’s what the administration is beginning to do. There’s still a need to protect people, but maybe the way to do it is to focus on the retirement product – on its fees, its practices, and its returns — rather than just imposing fiduciary duty on the employer and hoping they’re willing to do so.
There’s no reason, for example, why many employers couldn’t automatically enroll their employees in a third-party plan, have the plan file the reports and be the legal fiduciary, and have the government regulate the plan instead of the employer. This approach, allowed under ERISA, is called a multiple employer plan, “MEP” in pension-speak. Historically, the Department of Labor has been uncomfortable with MEPs and limited their use because of the risk that a plan participated in by many employers but operated by a third party might end up being supervised by no one at all. Nonetheless, the administration is now advancing the MEP concept in two ways:
- Using the discretion it has under ERISA, DOL now allows states to set up multiple employer plans. DOL’s reasoning is that states don’t have a profit motive and are politically accountable, so it’s easier to trust them and let employers “off the hook”.
- Proposing that the Congress enact legislation that would enable private parties to operate MEPs, with safeguards to protect retirees. It would be easy to conclude that this is a non-starter: thanks to the widening gap between the political parties, Congress has been unable to agree on any general pension legislation since 2006. (The entirely sensible and once-upon-a-time bipartisan proposal to require employers to offer at least an IRA, now made annually by the administration, became a casualty of the Obamacare wars.) Nonetheless, in recent years “open” MEPs have been proposed by both Democrats and Republicans and in the last session of Congress, a bipartisan compromise almost made it into legislation. If the endorsement of the administration doesn’t taint it, Congress might decide, finally, to act.
The administration’s announcement is thoughtful in other ways. For example, there’s a proposal to set up pilot programs for “gig” workers who don’t have “employers”, but who someday will nonetheless still retire.
Since in the past year the administration has really stepped up to improve retirement security (see, for example, my recent note in Institutional Investor, it is not a criticism to note that much of yesterday’s announcement was a catalog of actions they’d already started. Nonetheless, the willingness to do more than just reissue last year’s catalog bodes well – and the tens of millions who currently lack any savings at all may someday have a more secure retirement as a result.