Pooling retirement assets receives cautious welcome

The hand of the financial services lobby can be detected in a new push by President Donald Trump to bolster retirement savings in the US, but not all industry groups are convinced the measures will help Americans to save for their future.

On August 31 President Trump signed the “Executive Order on Strengthening Retirement Security in America”. This directed the Department of Labor to ease regulations that make it difficult for small businesses to access so-called multiple-employer retirement plans (MEPs) — a structure whereby multiple businesses band together to participate in a single retirement plan.

Presently MEPs are mostly used by trade associations and networks of small employers, because labour regulations require that retirement assets from different businesses can only be pooled for an MEP when the businesses are considered “related”. The executive order effectively asks that these restrictions be eased so that unrelated businesses can pool their pension assets.

There is evidence of a lack of access to pension schemes for employees of small businesses. Last year, around 89 per cent of workers at companies with 500-plus workers were offered retirement plans, according to the Bureau of Labor Statistics, compared with only 53 per cent of workers at businesses with fewer than 100 staff.

“We’re very supportive of the idea of multiple employer plans,” says Lisa Bleier, managing director of public policy and associate general counsel of the Securities Industry and Financial Markets Association (Sifma), which lobbies on behalf of broker-dealers. “We’re looking for options that will make sense to sell to businesses so that they can expand access and participate in retirement savings plans.”

Ms Bleier says that Sifma had lobbied both the White House and Congress on expanding access to retirement savings, but she would not be drawn on whether the efforts influenced the executive order. MEPs make it easier for small businesses to access economies of scale, by sharing costs with fellow employers. This, Ms Bleier says, is something financial advisers can use to sell to small-business owners.

But other lobbyists are not convinced. “There are pros and cons to MEPs,” says Karen Barr, chief executive of the Investment Adviser Association, which represents advisers registered with the Securities and Exchange Commission.

“At first blush it’s a positive if it gets more employers to have plans,” she says. “But there are all kinds of complications.” As an example, she says, if one plan breaks rules banning discrimination in favour of highly compensated employees, the whole MEP may end up being unwound.

In any event, there are already bills in Congress that will make multi-employer plans easier to access, Ms Barr says, suggesting that the issue was already being addressed.

The order also directs the Treasury Department to inspect a longstanding rule which forces investors to begin withdrawing funds from their retirement accounts at 70½ years old.

The department has been tasked with assessing whether the age should be increased, due to improved life expectancy.

Lobbyists argue this would encourage savers to keep their retirement pot untapped for longer. “To force individuals to take money out of their accounts because of an arbitrarily determined age seems like a concept that needs some updating,” says Ms Bleier.

Frank Paré, president of the Financial Planning Association and a practising financial adviser, says letting small businesses group 401(k) plans and raising the minimum distribution age would be good steps. But he highlights the decline of the Department of Labor’s proposed fiduciary rule, which would have beefed up and extended the requirement for financial professionals to act in a client’s best interest.

“Fundamentally, even if you assume every business could offer a 401(k), but it wasn’t under a fiduciary standard, then the question becomes — it is really beneficial?”

Registered investment advisers are already held to a pre-existing fiduciary standard. Broker-dealers, however, are not.

“Often with 401(k)s . . . all the employers receive is a sales brochure and a website address where they can sign up and select funds. The employees have to figure it all out on their own,” says Mr Paré, who would like to see more of an element of advice in MEPs. “Otherwise it might be creating more harm than good.”

A proposal is being reviewed by the SEC to force broker-dealers to act in the best interests of their clients. While supportive of the sentiment, the FPA and IAA believe the proposed regulation does not bring the duty of care up to a true fiduciary standard.

“As an industry, we can do a better job,” says Mr Paré. “Our advocacy is aimed at helping the industry do a better job at ensuring the average person can be well informed and counselled on how to best plan for their ultimate financial future.”