The U.S. Department of Labor issued a final rule that will expand accessibility of affordable retirement plans to small businesses. The rule, which has an effective date of September 30, 2019, may be changed after comments to it from the public are reviewed (the deadline for comments is October 29, 2019), but here are some facts to explain what association retirement plans (ARPs) are about so you can decide if they are a retirement plan option for your company going forward.
The Bureau of Labor Statistics found that 38 million employees (approximately 53%) working for small and mid-sized companies do not have access to retirement savings. A Pew Charitable Trusts survey found that the main reason for not offering a retirement plan was cost. I’ve seen estimates that plans with less than $10 million in assets pay 4 times as much in administrative costs.
What are ARPs?
In order to offer small businesses the ability to afford a retirement plan, the DOL’s rule permits groups of employers to band together in an Association Retirement Plan (ARP). The ARP operates as a multiple employer plan (MEP). It’s referred to as an open MEP because it operates on behalf of unrelated employers.
The group—a trade association or chamber of commerce—can offer their members that are small employers the option of obtaining a retirement plan at a cost similar to what large companies obtain. The ARP reaps economies of scale for administrative costs (e.g., there’s less paperwork and professional fees because the association does the required filings with the DOL and IRS rather than the individual employer) and can offer a wide array of investment options. The type of plan that can be offered by the ARP is a defined contribution plan, such as a 401(k) plan. The rule does not encompass a defined benefit (pension) plan.
The final rule makes it clear that employers using an ARP do not have to be in the same industry or within the same geographic area. And sole proprietors and other business owners without employees can participate in an ARP.
What you should do?
If you don’t have a retirement plan in place for your business and want to start one, keep ARPs in mind. Check with your local chamber of commerce or a trade association to which you may belong. The group may offer an ARP for 2020. And watch for more details about ARPs that are likely to come not only from DOL but also from the IRS.