Elimination Of Employer Oversight Could Result In Excessive Fees, Bad Investments, Potential Fraud
History is filled with stories of broken promises of retirement income security. ERISA ensures that benefits in employer-sponsored retirement plans are protected from bad actors – but proposed legislation would reduce those protections.
The Small Business Employees Retirement Enhancement Act would eliminate the fiduciary role of small employers in protecting employee retirement benefits from self-interested service providers.
This bill would create a new type of “open” multiple employer plan (MEP), a retirement plan that can be maintained as a single plan in which two or more unrelated employers participate. Several versions of this concept, which seeks to expand coverage of employees working for small companies, have received bipartisan support on Capitol Hill. I am enthusiastically supportive of the idea of broadening coverage of employees in retirement plans, but this particular idea comes with too much systemic risk.
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It is hard to imagine how eliminating employer oversight, which has been an integral part of our employer-sponsored retirement system, would be a benefit to small business employees. Under this proposal, employees would be left at risk for excessive fees, bad investments and potential fraud. One of the key principles behind ERISA is that employers are much more likely to protect their employees because of their mutual interests and relationship. No such close relationship exists with plan service providers.
The bill’s supporters are looking to insulate the plan sponsor from fiduciary liability because they think this is a barrier to plan adoption, and thus see the elimination of that role as a step on the path to increasing retirement plan coverage. Will service providers really make decisions in the best interests of plan participants? This idea is full of potential conflicts.
Interestingly, concern about fiduciary risk doesn’t appear to be the biggest barrier to employers offering a retirement plan. A recent survey of employers by Pew Charitable Trusts found many reasons why employers don’t sponsor a retirement plan. Survey respondents noted that:
- A retirement plan is considered too expensive to set up.
- They have a lack of resources to administer the plan.
- Their employees are not interested in an employer-sponsored retirement plan.
It’s important to note that concern about fiduciary liability did not make the list.
There are better options being proposed that would address the concerns small employers actually have cited for not offering a retirement plan, while maintaining the essential employer role of protecting workers’ retirement nest eggs.
Any legislation that stands between employers and their protection of employee interests puts employee retirement savings at risk. Hopefully, the midterm election results will positively impact this discussion – although I’m not holding my breath.
By Paul McEwan, CPA, MTax, AIFA (New Philadelphia, office)