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New Retirement Plan Option May Be on Horizon

Multiple employer plans would allow unaffiliated small businesses to join together to offer 401(k)s.

Momentum to improve access to retirement plans has increased in recent years, mostly at the state level. Now, there’s the possibility of opening up a new kind of retirement plan to all workers, particularly small-business employees, thanks to a boost from Washington.

An executive order signed recently by President Trump calls on the Labor Department to explore a path forward for multiple employer plans, or MEPs, which allow unaffiliated small businesses to join together to offer 401(k) plans. The idea is to make it easier for small businesses to make retirement savings plans available to more workers, since a joint effort could reduce some of the cost and complexity involved.

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Efforts to broaden access to retirement-savings plans, including MEPs, generally have widespread support. Phil Waldeck, president of Prudential Retirement, says expanding MEPs is “so critical to both the traditional workforce and gig workers.” Richard Johnson, director of the Program on Retirement Policy at the Urban Institute, notes that most people save for retirement through their workplace plans, but relatively few small businesses offer them. In 2017, he says, only 46% of private-sector firms employing fewer than 100 workers offered a retirement plan, compared with 94% of private-sector companies with at least 500 workers.

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A handful of MEPs exist, but they are limited to employers who share an industry association. A small group of car leasing companies, for example, could create a MEP. The executive order’s purpose is to eliminate that restriction and expand MEPs’ reach, Johnson says.

At this point, it’s unclear how or when policymakers in Washington will act to expand MEPs. There aren’t many details in the order about how the plans would be created and organized. But new attention to alternative retirement plans may benefit workers and small business owners regardless of what happens with MEPs, says Terry Dunne, managing director of retirement services at Millennium Trust Company.

Current Retirement Plan Options for Small Businesses

If you own a small business or are self-employed, you already can choose among retirement plans that allow you and any employees to make pretax contributions and let your money grow tax-deferred until you withdraw it, just as 401(k) plans do. And some plans allow you to contribute far more than the regular IRA limits.

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Most of these plans are simple and inexpensive to set up and maintain, although you do need to follow each plan’s rules and limits for contributing. “A lot of people don’t even know other choices exist, but there are great alternatives,” says Dunne.

For example, a SIMPLE (savings incentive match plan for employees) IRA can be used by a business with 100 or fewer employees. Both the employer and employee can contribute. The employer matches employee contributions up to 3% of compensation, which can be reduced to 1% in any two out of five years. Or, an employer can contribute 2% of each employee’s compensation, up to $5,500.

You can open a SIMPLE IRA through Millennium, Fidelity or other financial-services firms. Costs can vary by plan provider.

If you have just a few employees or you are self-employed, you can contribute up to 20% of net income, to a maximum of $55,000, to a simplified employee pension (SEP) IRA in 2018.

If you are self-employed, you might consider a solo 401(k), which allows you as an employee to contribute $18,500 for 2018, plus up to $6,000 extra if you are age 50 or older. You also can contribute up to 20% of your company’s net earnings as a sole proprietor, although total contributions can’t exceed $55,000 (or $61,000 if 50 or older).

Dunne says another current alternative is a payroll deduction IRA, which doesn’t have plan document or filing requirements. Any size business can offer it. With a payroll deduction IRA, an employee sets up a traditional or a Roth IRA and authorizes a payroll deduction for it. The employer submits the employee’s deduction to the financial institution.

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