SAVE Act Would Help Small Business Retirement Plans

Named the SAVE Act, Congress has reintroduced legislation that would give small businesses greater flexibility and enhanced incentives for sponsoring employer-based retirement plans for their employees as well as promote the disclosure of retirement savings in the form lifetime income to plan participants.

The Small Businesses Add Value for Employees Act (SAVE Act) was recently introduced and is sponsored by Congressmen Ron Kind (D-WI) and David Reichert (R-WA).

Why Congress Thinks the SAVE Act is Needed

© Christopher Howey / Fotolia

The SAVE Act would assist small businesses by improving access to existing SIMPLE IRAs as well as create a new plan offering the Multiple Small Employer Plan (MSEP). Approximately half of the U.S workforce does not have access to an employer-sponsored 401(k) plan, according to the Employee Benefit Research Institute. Furthermore, just 14% of small businesses currently offer a 401(k), and 63% do not provide any retirement benefits, according to a small business survey from Harris Interactive.

As traditional defined benefit (DB) pension plans gradually fade from existence, the onus will be on workers to take charge of their retirement savings. However, many employees who have access to an employer-sponsored defined contribution (DC) plan are not taking full advantage of the opportunity to contribute. In the past decade, private-sector employers have made a notable shift from DB to DC plans. Worldwide, DC assets have grown 7.5% annually, while DB plan assets have risen just 2.9%, according to a Towers Watson study.

Additionally, the number of DB plan participants in America dropped from 62% to 7% between 1979 and 2009, according to the Employee Benefit Research Institute (EBRI). By comparison, DC plan participation increased from 16% to 67% over the same period.

By year-end 2009, U.S. DC plan assets weighed in at $2.8 trillion. Despite the prevalence of DC plans, overall contributions have declined in recent years. In the U.S. and Britain, combined DC plan contributions (by employers and employees) total approximately 9-10% of payroll. By contrast, employers’ DB plan contributions comprise around 20-25%. Additionally, DC plan balances in the U.S. averaged just $58,351 at the end of 2009, according to EBRI.

Participating in a DC plan forces employees to make decisions that they may not be comfortable making, such as their deferral rate and asset allocation. Additionally, nearly all of the risk of DC plans is passed on to employees, whereas employers shoulder most of the inherent risks of traditional DB plans. Improvements in DC plan contributions are only part of the retirement readiness equation, however.

A major concern is that workers will underestimate the savings they need for a comfortable retirement, and overestimate their investment returns. Since DC plan results are based largely on investment performance, two workers with the same career paths and salaries could end up with vastly different savings at retirement.

What Does the SAVE Act Propose?

In addition to enhancements provided to SIMPLE IRAs, current disincentives to pooling of plans would be eliminated under a MSEP, thus providing small businesses an attractive option that would help reduce plan costs and address administrative burdens — two common concerns expressed by small employers.

The bill also includes a provision that would require disclosure to participants on benefit statements their savings in the form of lifetime income.

For Updates on the SAVE Act

To learn more about the SAVE Act and the possible impact for your retirement plan, please contact us.

save act retirement, save act for small business, SAVE Act 401k, save act 2011 retirement, SAVE Act small business