Access and Coverage in the SECURE Age
For years, many employers struggled to provide their workers with retirement plans that were easy to administer. But that changed with the passage of the Setting Every Community Up for Retirement Enhancement (SECURE) Act in 2019.
The SECURE Act created a pooled employer plan (PEP), a new type of multiple employer plan (MEP) that allows unrelated employers—companies from all industries, geographic regions, and sizes—to participate in one 401(k) plan managed by a pooled plan provider (PPP). PPPs are typically 401(k) recordkeepers, banks, human resources companies, third-party administrators (TPAs), payroll providers, or registered investment advisors.
The SECURE Act marked a historic win for private employers by allowing them to shift most fiduciary responsibilities to PPPs via PEPs. In addition, the SECURE Act eliminated the requirement that members of an MEP must share the same trade or have a principal place of business within the same state or metropolitan area.
The SECURE Act also altered the landscape of employer-sponsored 401(k) plans by repealing the “one bad apple rule,” where compliance violations by one employer could penalize—and potentially disqualify—the entire plan.
Meanwhile, some states have begun to offer state-run retirement plans for employees of private companies that don’t provide retirement plans. For example, California now offers CalSavers, which gives employers a way to help workers save for retirement without the company assuming administrative fees or fiduciary liability.
To take a closer look at the sweeping changes brought on by the SECURE Act and the emergence of state-sponsored programs, Melissa Kahn, Head of Retirement Public Policy at State Street Global Advisors sat down with Troy Tisue, president of TAG Resources, a PPP that was recently acquired by Transamerica, and Katie Selenski, executive director of the CalSavers Retirement Savings Board. Following is an edited transcript of these conversations.
Serving the micro market: Troy Tisue, president of TAG Resources
Melissa Kahn: Lots of exciting things are going on in the PEP space, and your company has been very involved. Can you tell us a little bit about what the Transamerica exchange model is?
Troy Tisue: The exchange model is basically version 2.0 of the original open multiple employer plan. The open MEP was successful because it allowed unrelated companies to have the same benefits as traditional retirement plans offered by individual employers directly. But when the open MEP world shut down in 2012, MEP sponsors pivoted to become 3(16) fiduciaries. One key advantage that we didn’t appreciate at the time was being able to take advantage of the small plan filer exemption: The majority of companies that used open MEPs did so because they didn’t have the time or the resources to run a plan properly. So they were looking for someone to outsource it to.
One of the Achilles heels that still remains is that if an MEP has any success at all, you’re going to be required to do an annual CPA audit. That can be a pretty significant cost even when you share it across all the employers in the plan.
The exchange is the exact same construct as a PEP in terms of roles, responsibilities, benefits and features, but from a Form 5500 perspective all these plans are single-employer plans. As a result, we’re able to take advantage of the small plan filer exemption, where employers aren’t subject to an audit cost. To me, the exchange represents the best version of a pooled structure in terms of flexibility and freedom.
Kahn: From what you’re saying, SECURE wasn’t a transformative provision—it was a more incremental removal of or incentive for some of the hurdles that existed previously. Have you had to overcome any hurdles with this new model?
Tisue: SECURE certainly has created momentum, if only to spur conversations around better ways to achieve scale, though there haven’t been as many PEPs as everyone predicted. There were two parts to this, though: the PEP and the GoP. The group of plans (GOP) was meant to be the alternative to the PEP. It was designed to enable us to escape the trappings of MEPs/ PEPs and be able to file on time without having to be at the mercy of the late employers. It has the added benefit of keeping that small plan filer exemption intact, so that only large plan filers are pooling together for the required annual audit.
The Department of Labor (DOL) was heavily influenced on this one and, at least right now, we're at a stall on this great solution to pooled coverage. The American Institute of Certified Public Accountants (AICPA) has been lobbying the DOL to require each company in a GOP to have an individual audit, which adds cost and makes it more difficult to expand coverage. They even tried to insert the need for an additional trust audit. That's self-serving, and it compromises the SECURE Act's expansion intent.
Kahn: There’s been a lot of concern about whether state plans would have a positive or negative impact. How do you view state plans in terms of the opportunities and challenges that they create for your company?
Tisue: I'm a fan of anything that puts people closer to retirement and helps them reach their retirement goals. But my critique of state programs is that they are not subject to the Employee Retirement Income Security Act (ERISA). Protections for employers and employees are the whole premise of ERISA, and you don’t necessarily get those protections with a state-run plan. So we either need to abolish ERISA, which gets controversial, or we’ve got to put some parity in place about participant protections.
Kahn: So, how does your company’s program work?
Tisue: At TAG, exchanges are pretty much our bread and butter, and we run those as a lead fiduciary. We're 3(16)s for entities that are trying to be pooled plan providers but don't have the background or technology to do so. It opens the door for us to work with a lot of folks that we traditionally wouldn't have had the opportunity to work with in the past.
Kahn: What’s your vision for the future? Where do you see PEPs, MEPs and exchanges going from here?
Tisue: I heard a stat recently that there could be as many as 900,000 startups coming into the system in the next 24 months. If you look at the number of recordkeepers out there, we’re not equipped to handle all those startups with today’s approach—it’s far too manual. We're just one small segment of the marketplace, but one thing we all need to be thinking about is how to scale. To me, that's what the future is—it’s about being able to tackle more volume while delivering all the things that we know we need to do in order to help workers save for retirement.
Proving the state plan concept: Katie Selenski, executive director of CalSavers
Melissa Kahn: California was the first state to pass legislation on a state-based retirement plan, the third state to implement it and, of course, the largest. Can you share with us why California decided to move forward, given what must be a very daunting task?
Katie Selenski: California, just like every other state in this country, is experiencing a retirement security crisis. Nationally, nearly 57 million Americans don't have access to a retirement plan at work. In California, seven or eight million workers go to work every day, follow the rules, do what they're supposed to do and yet don't have access to a way to save for retirement via their paycheck. And that's a problem. We know that people are 15 times more likely to save and be on a path to retirement security if they have a way to save through work—to set and forget their retirement plan contributions from their paycheck. Our program’s goal is to level the playing field and provide all California workers access to retirement plans through their jobs.
Kahn: It's so impressive, given the size of your state, what you've accomplished in such a short period of time. Can you provide some stats about where you are now?
Selenski: Our best estimate is that there are about 600,000 employers in the state that don't offer some kind of retirement savings program. Just under half of those are subject to our current mandate, meaning that they have at least five employees. We recently completed our third annual rollout of employer compliance deadlines. So far, we have 108,000 employers in the program at various stages of onboarding and about 350,000 funded accounts. We expect tens of thousands of employers to come on in the next six months, and we have another compliance deadline coming on December 31 for about 25,000 employers who are brand new to the mandate.
Kahn: You’ve recently succeeded in passing new legislation that increases the number of employers that would be subject to your program’s mandate. Tell us about that.
Selenski: We supported Senate Bill 1126, which will take the mandate threshold from five or more employees to one or more employees, covering another 300,000 employers. So another three quarters of a million people will now gain access and the opportunity to save through CalSavers. We’re grateful to our board chair, state Treasurer Fiona Ma, for sponsoring the bill.
Kahn: That’s very exciting. What are the greatest challenges that you've faced so far and the greatest rewards?
Selenski: We launched fully statewide on July 1st, 2019, six months before the pandemic. I think that this would have been a very challenging proposition even without a global pandemic and the kind of economic destruction that it brought. It's a brand new, bold program, and we don’t have the funding to do TV ads or radio placements. So getting the word out has been tough, especially given all of the other challenges that small businesses have been dealing with during the pandemic. We’ve tried to be really accommodating and sympathetic, balancing sensitivity to the plight of small businesses during a pandemic with the fact that the legislature put our program into place because they're serious about addressing retirement insecurity. That's been tough, but I think we're emerging into recovery, and the response rate so far suggests that employers are ready to comply, either by joining CalSavers or setting up a new private plan.
Kahn: As you know, the SECURE Act included a provision to create pooled employer plans, which are another vehicle for small businesses to band together for economic efficiencies. I'm curious what you’ve seen in your state in terms of how PEPs are being formed and if you view them as complementary to your program or a challenge to it.
Selenski: We haven't taken an official policy position on PEPs, but I’m personally excited to see new private retirement plans being formed. I hope that PEPs are effective and that employers who were on the fence about offering a 401(k) will use this new option.
Kahn: Where do you see the future of state-run retirement plans going? And with more states creating retirement programs, do you think it will lead to a federal solution down the road?
Selenski: I personally hope it does lead to a federal requirement because we want to see workers across the country gain access to retirement plans. Our state took action because of a lack of action at the federal level, but there’s still room for a complementary approach. It seems like there would be a role for the existing state programs to play if a national standard were to be enacted without the establishment of a national public option, but it’s too early to say. In the meantime, we're going to keep marching ahead and proving the concept here, and we’ll collaborate with other states as opportunities arise to improve access to retirement security.