Personal Finance

Small firms may have a new way to offer 401(k) plans to their workers

Key Points
  • The rule, issued in July by the Labor Department and effective Monday, aims to expand the use of so-called multiple-employer plans.
  • Companies in different industries can band together to offer their workers a retirement plan through certain organizations, as long as they are located in the same geographical area.
  • A similar, but broader, proposal continues to idle in the Senate as part of the Secure Act.

If your employer doesn't offer a retirement plan, a new option might change that.

A federal rule now in effect allows companies to team up through certain employer groups and professional organizations to offer a shared 401(k) plan to their workers. The rule, which aims to expand the use of so-called multiple-employer plans, comes as a similar — but broader — proposal continues to idle in the Senate as part of the Secure Act.

"Both go to the same issue, which is how do we get plans to more workers," said Bradford Campbell, a partner in the Washington, D.C., office of law firm Drinker Biddle and an expert in employer-sponsored retirement plans.

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The target is the 38 million employees who don't have a workplace retirement plan, according to figures from the Labor Department, which issued the new federal rule in late July. Lack of access is more pointed among small businesses: In 2018, 53% of workers at companies with fewer than 100 workers had access to one, compared with 85% of workers at larger companies.

Small-business owners have cited cost and administrative headaches as reasons they don't offer retirement plans of their own to their workers. The new Labor Department rule aims to reduce those issues by making regulatory changes to allow local or state associations of employers — i.e., chambers of commerce — to sponsor a 401(k) plan that members can offer to their employees. Companies located far apart that want to band together would need to be in the same industry.

In addition to being offered through employer associations, these plans could also be offered through specific firms that handle human resources tasks for their business clients.

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The Secure Act, meanwhile, includes a provision to allow companies to join a multiple-employer plan regardless of their membership in a professional organization or their industry. In other words, their only commonality would be their participation in a shared 401(k) plan for their workers. The measure also would allow financial-services firms to offer those expanded multiple employer plans to their business customers, Campbell said.

It's uncertain how many organizations may end up sponsoring a plan under the Labor Department rule.

"I think it has potential value in the marketplace, but it will probably be smaller in scale than the [Secure Act provision] would be," Campbell said.

There has been some interest among state and local chambers of commerce in making retirement plan available under the new rule, said Chantel Sheaks, executive director for retirement policy at the U.S. Chamber of Commerce.

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While the national group wouldn't qualify to offer a retirement plan to members, Sheaks said, it is serving as an educational resource for state and local chambers interested in learning more about offering a retirement plan to its members.

"If you're interested, I'd suggest reaching out to your local chamber to see if they'll sponsor one," Sheaks said.

The Las Vegas Metro Chamber of Commerce is already on the case. The group, which set up a 401(k) plan in advance of the new rule taking effect, is prepared to sign up the 56 employers — representing 2,000 workers — that have expressed interest in "taking it to the next step," said Joe Caldera, a wealth advisor with Las Vegas-based Caldera Wealth Management Group, which will be handling the administration of the plan.

The annual management fee for participants is just under 1% of assets managed. On top of that, participants will pay fees charged by the underlying investments they choose.

Meanwhile, a handful of states have taken steps to address the lack of retirement plans among small businesses as well. Some of those initiatives require employers of a certain size to participate in a state-run retirement option if they don't already offer one to their workers.

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