The ARA on Coverage: Let’s Get More Employers into the Retirement System

Andrew Remo, Director of Legislative Affairs, American Retirement Association

Andrew Remo has worked for the American Retirement Association’s government affairs department for more than eight years.  He advocates before Congress and in the States for policies that achieve the American Retirement Association’s mission to give every working American the ability to have a comfortable retirement.  Before joining the American Retirement Association, Andrew worked as a staff member for U.S. Senator Benjamin L. Cardin (D-MD) and was responsible for various policy portfolios, including tax and retirement issues.  Andrew holds a Master of Arts in Government and a Master of Business Administration from the Johns Hopkins University as well as a Bachelor of Arts in Political Science from the American University. 

Andrew – Andy -- the American retirement system is performing well in many ways, but we still see shortfalls in access and use. What could we do better?

I think the critical point is access to a retirement plan through the workplace.

The Employee Benefits Research Institute (EBRI) has produced data over the years suggesting that if moderate income earners – those who make between $30,000 and $50,000 a year -- have access to a retirement plan at work, they're 12 times more likely to save for their retirement than those who do not.

When workers don’t have access to payroll deduction-based savings, they have to go to a financial institution on their own and open up an IRA, then write a check and deposit it. A chunk of potential savers drops off at each of those hurdles. Yet if they can save through payroll deductions on a regular basis, those people will save for their retirement.

So that's really what we need to focus on. The state Auto IRA programs are one solution. And then hopefully there will be federal solution, maybe even this year.

OK! Let’s talk about usage. We see a respectable number of folks who have access at work who still don’t save.

Yes. A number of our members are plan advisors. As part of their role, they support employer plan sponsors by engaging with participants on a regular basis, highlighting the benefit their employer provides. They may even talk to individual employees about their financial circumstances and to help them consider participation.

Our advisor members try to lift the curtain on financial products and investments to increase understanding and confidence. These decisions can be intimidating if you are not financially experienced.  Interestingly, our members also tell us that, particularly for moderate income workers, they're often the only financial professional that those folks ever interact with.

So our plan advisors play a key role in providing financial education and getting people more comfortable with using financial products and saving for themselves.

There’s not a silver bullet that solves all these issues. At the same time our members take pride in being in the trenches, if you will, to provide personalized support.

Taking a detour, are you seeing an increase in the use of automatic features to support usage and savings?

Yes, absolutely. There's been a steady increase in the use of automatic features.  The American Retirement Association’s newest sister organization is the Plan Sponsor Council of America (PSCA). PSCA puts out an annual survey asking plan sponsors about design, including whether their plans include or will be adding automatic features.

Every year we see upticks in the number of employers that are offering plans with automatic enrollment and auto-escalation features. That trend started about 14 years ago when Congress passed the Pension Protection Act of 2006, blessing these automated features within the defined contribution system.

It's exciting because that's “already” 14 years ago. You're going to see the true impact of those automated features in the next 20 years when we have people retiring that will have participated in the automated defined contribution system throughout their working careers.

That's going to be one true measure of success related to making savings easier.

Question: do you see private sector plan sponsors raising standard savings levels to 5% or 6%, in line with state programs and typical corporate match levels?

The behavioral economist Brigitte Madrian released a paper in 2012 finding very minimal drop-off in the number of participating savers whether you started them saving at 3% or 6%.

In fact some federal proposals circulating today would create a new safe harbor arrangement (similar to protections offered by PPA 2006) when plan sponsors start the automatic deferral rate 6%, escalate to 10%, and offer a matching contribution stretching all the way out across that 10% savings level.

This concept is called the secure deferral arrangement. It's a stretch match plan design that Mark Iwry was developing when he was a at the US Treasury during the Obama administration.

We support this idea. We believe that starting at higher levels and using auto escalation will increase retirement savings adequacy. When you start higher to begin with, you get the power of compound interest on those greater early savings over the course of your life. I'm all for it.

We know you've been involved in commenting on design and legislation related to some of the state auto IRA programs. What do you like and what don't you like?

What we most like about these state programs is that they require businesses over a certain size to offer a retirement plan, which increases coverage.

I think the main thing we would like to improve in some states is to broaden the types of products that employers can use to meet the state requirements for employer exemption from facilitating.

Some state program proposals would, unnecessarily in our view, exclude private sector automatic enrollment payroll deduction IRA products from being used to meet their employer exemption requirements.

This would align with your members’ services, as well.

Returning to what we like, the employer requirement is a key principle for us. We think it’s critical to the success of these state initiatives. Because what's the point otherwise?

We feel strongly that there are already plenty of retirement plan products available that fit the needs of small businesses. Our members specialize in this market and create product offerings for small- and medium-sized businesses. The problem isn't lack of product, it's lack of employer interest, or the time and the expense to do something.

The way I like to explain the state initiatives that have the requirement for businesses to do something is that these states are essentially auto enrolling employers into the system.

That’s a new perspective!

As we discussed earlier, we've seen how effective it’s been to auto enroll employees into plans. Look at 401(k) plans with an opt-in feature. They achieve about a 70% participation rate. 401(k) plans with an opt-out feature achieve great than a 90% participation rate.

There will always be that certain subset of employers that will just not comply, but you're going to have good faith compliance for the vast majority of covered employers under these Auto IRA programs. So I look at it as nudging the employer to do something and believe that nudge will be effective in closing the coverage gap. That's a key principle for us.

We support these initiatives, but for them to work they need to have that requirement. I like to call it an offer requirement. Some people throw around the term mandate. I think that's politically loaded. I think the way these programs are structured impose as minimal a burden as possible on employers to provide access to retirement savings at work. 

These state initiatives are largely IRA-based, do not require employer contributions, and absolve employers from any liability other than facilitating the payroll processing.  And that is the sweet spot to close the coverage gap.

Restating what you're saying: coverage is one of the key elements that makes programs like this attractive to you, especially where it would not otherwise be available.

Coverage for all. That meets a core element of our mission, which is to advocate for policies that give every working American the ability to have a secure retirement. That's a moral principle of our organization.

Andy, what can the retirement saving system do or be that would lighten the burden on employers without creating a lot of nutty risks for employees who are participating?

Automation is good. Employers have a fiduciary responsibility, so they need to talk with their service providers and make sure they're doing best for their employees, because this is ultimately the employees’ retirement benefit. Making communication about the plan as simple as possible and as user-friendly as possible, I think is critical.

What about MEPS and PEPs as a simplifying tool for employers – what are you hearing from your stakeholder base?

I don't anticipate too much rearranging of the deck chairs. If an employer already has an individual 401(k) plan, I believe that's pretty sticky.

I think MEPs and PEPs are intended to capture those employers that might have been too intimidated to adopt an individual 401(k) plan, but would be comfortable with a turnkey PEP 401(k) that is potentially more cost or time efficient.

I will say, these new arrangements are voluntary. So I don't think MEPs and PEPs are going to be a game changer in terms of solving the coverage problem.

We were surprised that the Joint Committee on Taxation experts estimated that PEPs would increase coverage by up to hundreds of thousands of new employees. I'm personally skeptical that it will make that much difference. We'll just have to see.

I know that large financial institutions are developing pooled employer plans -- PEPs, MEPs, and open MEPs -- and ARA has been supportive of that concept. There will be a lot of marketing money behind those products; I would hope that employer take up would follow. And maybe that will convince some employers on the margins to use PEPs. We have a ways to go to see how that develops.

And maybe some employers would be willing to switch into PEPs, if PEPs were significantly cheaper than standalone plans.

Personal opinion: “better” may come in the form of convenience and lower levels of responsibility and decision-making, as a trade-off for the configurability that individual plans provide.

Yes. This is totally a conversation about the small- and mid-size employer marketplace. Our members typically serve boutique employers, like doctors’ offices, small legal firms, and other profitable service economy-oriented entities, like architects and plumbers. If they have an individual 401(k) plan, some of those designs are very specific to that employer and they're not going to want to get to a cookie cutter, turnkey, one-size-fits-all MEP, because that might be less beneficial to the business owner.

Andy, what makes you most hopeful in the retirement savings space today? What are you looking forward to one, two, three years out?

What makes me most hopeful is having a Chairman of the House of Representatives Ways & Means Committee who cares a lot about retirement savings, Representative Richie Neal of Massachusetts.

I don’t mean to overstate – but it has truly been a godsend for these issues to have Representative Neal take over as Chairman of the committee that creates new law in this space.  I have been closely monitoring the policy developments in this space as a lobbyist for ARA since 2012. We’ve seen little happening at the federal level until Neal took over as Chairman. With his leadership, the SECURE Act passed within the first eight months of his Chairmanship when it had been previously just languishing. And now you have the multi-employer pension system being shored up as one of the first acts of this Congress, and the American Rescue Plan Act.

These accomplishments lay the groundwork not only for SECURE Act 2.0, which I think has a good chance of happening towards the end of this Congress, but for more fundamental reforms or improvements to the system.  

One of these is Chairman Neal’s Automatic Retirement Plan Act which is the federal solution to address the coverage gap, and Senator Wyden’s Encouraging Americans to Save Act, which creates in effect a government matching contribution to boost the retirement savings of moderate income workers.

Getting those proposals done would really be game changers in terms of providing access to moderate income workers to these arrangements, and providing a government match if, and when, they save in these arrangements. That would make the system more equitable, which is a very key concern of the Biden Administration.

A lot of the criticism of the current retirement savings system is that the incentives and access are skewed toward the wealthy.

We’re excited about having the opportunity to meet the moment in terms of having the Automatic Retirement Plan Act achieved, coupled with the Encouraging Americans to Save Act. These address the retirement coverage gap, provide for a government match and a refundable savers credit.

Putting these fundamental policy changes into effect would really make the system more equitable both from an access, adequacy and tax incentive perspective and gear this benefit toward moderate income workers. So that’s what I’m personally excited about.

Thank you! Final fun question: what are your silver linings of the pandemic?

Well, I have a three-and-a-half year old. Getting to spend a lot of time with her has been cool. I probably wouldn’t have had this same time with my daughter and that’s a silver lining.

Another silver lining is you get to re-evaluate your work-life balance a bit. I personally enjoy working from home. I think accelerating that trend, at least for me, has been a silver lining. We’ll see how that plays out! I miss interacting with office people face to face, but you don’t have to do it every day. Maybe we’ll see a hybrid model going forward. 😉

Thank you so much for your fresh insights Andrew Remo!  Want to connect directly with Andrew to ask him some of the questions we didn’t?  You can right here. Connect with Andrew on LinkedIn. And you can follow the work of Andrew and his peers at the American Retirement Association here and here.

This piece was featured in the April 22, 2021 edition of Retirement Security Matters. For more fresh thinking on retirement savings innovation, check out the newsletter here.