Douglas Ell, The Groom Law Group
The "Perfect" Retirement Plan
It may be time for a new type of retirement savings vehicle, a new kind of plan that employees can readily understand and that provides flexibility to both employers and employees. Such a new type of plan should recognize the changing nature of employee-employer relationships and should scrap clean layers of complexity that have been added over the years. It should be fully portable and easy to understand, yet flexible and secure. The "Perfect Plan" is an initial suggestion of how such a plan might be designed.
The Perfect" Retirement Plan is a concept for creating a new type of retirement savings vehicle. The basic idea is to combine some of the themes of recent legislation proposals - themes such as flexibility and portability - with a major reduction in costs and complexity. A "Perfect" Plan should be easy to understand, easy to set up and administer, and provide broad flexibility and protections for both employers and employees.
Perfect Plans might have rules such as:
Require that all employees (including part-time) and all independent contractors be eligible to participate.
Require immediate and full vesting.
Allow contributions as a fixed percentage of compensation as chosen by the employer, subject to limits.
Allow salary reduction contributions up to limits that increase with age.
Allow matching contributions if desired by the employer.
Allow employers to choose between guaranteed investment returns (like a cash balance plan) or permitting employees to choose between investment options (as per ERISA § 404(c)).
Allow employers to contract with regulated financial institutions to establish plan in such a way that the employer has no ongoing administrative duties (other than to make required contributions) and the employer is not a fiduciary.
Allow generous portability and rollovers.
Other simplifications and participant protections could be added.
A Perfect Plan would be very easy for a small employer to set up. The employer would not have to be a fiduciary subject to liability, and all administrative work and responsibility could be placed on a regulated financial institution. Independent contractors would be covered. The present rules would be drastically simplified. These features should increase the number of plans and the number of covered participants, while reducing administrative costs.
Substantial flexibility would allow employers and employees to save as desired. The present nondiscrimination rules are very complex and costly, and economically ineffective. A simpler way to encourage employers to contribute is to increase the limit on total contributions if the employer provides a match or a fixed contribution (as a percentage of compensation) for all participants.
