Labor Department Unveils Plan for Affordable Retirement Coverage

New rule allows small businesses to pool together to offer 401(k) plans for their employees
October 23, 2018 Updated: October 23, 2018

WASHINGTON—The Trump administration has unveiled a new plan that would expand retirement coverage opportunities for millions of small businesses.

The Department of Labor on Oct. 22 released a new rule that allows small companies to band together to offer 401(k) plans to their employees. Through the Association Retirement Plans, small businesses will gain access to affordable workplace retirement coverage.

Unlike large corporations, small firms don’t have economies of scale and, hence, they lack bargaining power. By pooling together, they will benefit from better negotiating power and lower administrative costs.

“Many small businesses would like to offer retirement benefits to their employees, but are discouraged by the cost and complexity of running their own plans,” Secretary of Labor Alexander Acosta said in a press release.

“Association Retirement Plans give these employers a simple and less burdensome way to offer valuable retirement benefits to their employees. The proposed rule helps working Americans–and their families–take care of themselves in their retirement years.”

Almost 38 million private-sector workers don’t have access to a retirement savings plan through their employers, according to the Labor Department.

Under the new rule, an association of employers in a city, county, state, or multi-state metropolitan area could offer these retirement plans to their members.

A particular industry nationwide could also offer the plans. Even sole proprietors and their families will be able to band together with peers and gain access to such plans.

Under the proposal, the plans could also be sponsored through professional employer organizations, which provide payroll, benefits, and human resources support to their client companies.

The rule will be open for public comment and may go into effect in early 2019, following comments and revisions.

On Aug. 31, President Donald Trump issued an executive order instructing the Treasury and Labor departments to expand retirement plan coverage for small businesses, part-time workers, sole proprietors, working owners, and other entrepreneurial workers.

Small Employers Lack Funds, Resources

According to a 2015 study by the Government Accountability Office (GAO), only 23 percent of the workers in firms with fewer than 50 workers are participating in retirement programs. The participation rate goes up to 60 percent for companies with more than 1,000 workers.

Due to their size, small businesses face difficulties in providing retirement benefits to their workers. A recent Pew Charitable Trusts survey found that these difficulties mainly stem from the high costs, limited resources to administer plans, and lack of employee interest.

The U.S. Chamber praised the Labor Department’s initiative.

The proposal “will allow small businesses to pool resources together to offer retirement plans, resulting in lower plan fees and fewer administrative burdens,” Aliya Wong, executive director of retirement policy for the U.S. Chamber of Commerce, said in a statement.

“Combined with new association health plans announced this year, small employers can now offer a complete benefit package to employees and have the ability to compete for the best talent.”

Earlier, the Department of Labor finalized rules for association health plans (AHPs) that went into effect on Sept. 1. The AHPs make affordable health insurance more accessible to small businesses by enabling them to band together.

Several chambers, farm bureaus, and associations throughout the country have already started to offer health plans to their members, Acosta said at the U.S. Chamber of Commerce’s small-business summit on Oct. 3.

“Under this approach, chamber of commerce and industry associations have the authority to almost stand in the shoes of small and midsize businesses and offer healthcare as if they were the employer,” Acosta explained.

Many small-business owners face high health insurance premiums and limited coverage options due to the Affordable Care Act, also known as Obamacare. Now, through these plans, they can gain many advantages enjoyed by large employers.

Small business owners can reduce their health care costs by as much as 40 percent, Acosta said.

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