EANJ Retirement Savings Plan Emerges as a Solution for Small Business

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Employers play a vital role in helping employees save and plan for retirement.

For workers, if you worked hard, you could count on a secure retirement at the end of your career. Individuals relied on a three-legged stool built from Social Security, pensions, and personal savings to help them live comfortably after a lifetime of work.

Or that was the expectation held by many workers until the manufacturing economy unraveled.

At present, over half of New Jersey workers – about 1.7 million workers – have no private retirement account. For those that do, the medium retirement account balance is $3,000 for all working households and $12,000 for near retirement households.

On average, retired New Jersey residents only receive about $1,377 a month from Social Security, and for about a quarter of recipients, Social Security is their only income.

The reasons include an unequal growth in wages fueled by the loss in high-paying manufacturing jobs and growth in lower-paying service sector jobs. Many of the jobs that have been recouped in New Jersey have been lower-paid jobs. The two employment sectors that have seen the largest increase since December 2007 are the ones where New Jerseyans earn the least: education and health jobs (including many low-paid jobs like home health aide), which have grown by 15.1 percent, and leisure and hospitality jobs (including retail and food service), which have grown by 5.1 percent. Typically, these jobs offer no retirement savings plans.

States and the federal government have pursued policy solutions to the retirement savings crisis. Several states have implemented programs that require employers to offer a retirement plan for their employees or else enroll their employees in a state-run IRA program. The Obama administration has supported these proposals and allowed them to proceed.

But these state programs have faced fierce opposition from some financial services lobbying groups, including New Jersey. A bipartisan plan to require small businesses to offer a portable retirement savings program administered by the state was rejected by Gov. Chris Christie in 2016 and sent back to the Legislature with revisions.

The governor's revisions made it optional for small businesses that don't offer retirement savings on their own to participate. The original language required businesses with more than 25 workers to sign on, or risk fines, and make the plan available to any workers who wanted to contribute; smaller businesses had the option of getting involved.

In addition, the governor's version calls on a panel of relevant state officials to select several commercial investment plans that private-sector workers can pay into to save for retirement.

But New Jersey is primarily a small business state.  And small businesses are not big sponsors of retirement savings plans, according to John Sarno, president of the Employers Association of New Jersey, "Small businesses do not sponsor retirement savings plans because of administrative burdens, fiduciary and legal issues, an absence of in-house expertise, costs and fees, employee turnover and/or a high percentage of part-time workers, the uncertainly of the company's future and higher priorities," says Sarno.

And costs are high too. The U.S. Department of Labor reports that the start-up costs for a small business are three times higher than a large business and administrative costs are twice as high.

To fill the void and to help its employer-members sponsor retirement savings plans for their employees, the Employers Association launched a multiple employer plan (MEP).

By adopting a MEP or merging its single-employer plan into a MEP, an employer transfers all or some of these fiduciary roles to the Association, which outsources administration functions, investment selections and legal compliance under the supervisor of fiduciary trustees.

Through the MEP, small employers have the same advantages – cost savings, investment advice, employee education –  as large corporations with thousands of employees.

According to Sarno, there are currently have 52 participants in the Association MEP, with another 40-50 Participants expected to enroll within the first quarter of 2017.

Total plan assets are approaching $4 million.

"We are creating great value for small businesses and helping to solve a major social problem. For some of these employers, it's the first time that they can sponsor a plan. Their employees are appreciative. It's a tremendous win-win-win," says Sarno.

Learn more about EANJ MEP