A push to expand workplace retirement coverage faces a familiar hurdle: employer liability. As policymakers nudge companies to add new retirement options, many firms are weighing legal exposure and cost before saying yes.
The debate centers on whether employers will adopt new or simplified retirement plans this year and next. Small and midsize companies are the main targets. Proponents say these plans could help millions of workers save. Skeptics warn that liability for investment losses and lawsuits could keep adoption low.
What Is on the Table
Recent federal measures, including provisions from the SECURE Act and SECURE 2.0, aim to make it easier for employers to offer retirement plans. Options include “starter” 401(k)-style programs with lower limits, pooled employer plans that share administration, and auto-enrollment features intended to boost participation.
These plans promise simpler administration and potential tax credits for small employers. They are designed to close a long-standing coverage gap among workers at smaller firms, part-time employees, and gig workers tied to traditional payroll systems.
Why Employers Are Hesitant
“Employers would have to decide to offer the plans — and experts anticipate many might be reluctant, as they could be held liable for losses.”
Workplace retirement plans fall under the Employee Retirement Income Security Act (ERISA). That law imposes a fiduciary duty on employers and plan committees. They must select prudent investments, monitor fees, and act in participants’ best interests.
Legal risk is not theoretical. Over the past decade, dozens of lawsuits have targeted plan sponsors over high fees or poor fund choices. In 2022, the U.S. Supreme Court reaffirmed that sponsors must regularly review investments in Hughes v. Northwestern University. Even when plans prevail, defense costs can be high.
The Legal and Cost Backdrop
For small employers, the fear is twofold: administrative burden and litigation risk. While tax credits offset some startup costs, ongoing duties remain. Employers must document processes, monitor vendors, and replace underperforming funds. That work often requires outside advisors and legal guidance.
Industry groups say pooled employer plans (PEPs) can spread risk and reduce paperwork by centralizing oversight. Yet companies still have a duty to prudently choose the PEP and monitor it. Critics argue that this lingering duty keeps liability concerns alive, even with simplified structures.
What It Means for Workers
Coverage remains uneven. According to federal labor data, a substantial share of private-sector workers at small firms lack access to a retirement plan at work. Automatic enrollment and matching contributions are proven to raise savings rates, but they only help when a plan exists.
- Workers at small businesses are less likely to have access to a workplace plan.
- Auto-enrollment features increase participation, especially for younger and lower-income workers.
- Without employer plans, many rely on individual IRAs, where participation is lower.
Advocates warn that delays in adoption will deepen retirement gaps for lower-wage workers. Some states run automatic IRA programs to fill the void. Those programs limit employer liability by keeping investment selection with the state, but contribution limits and features are narrower than many 401(k)s.
Balancing Risk and Access
Benefits consultants say guardrails can help. Defaulting workers into low-cost target-date funds, documenting fund reviews, and benchmarking fees are common steps to reduce risk. Others urge Congress and regulators to go further by clarifying fiduciary safe harbors for plan selection and default investments.
Employer groups want more legal certainty on new asset classes and plan designs. They argue that clear, stable rules would spur adoption. Worker advocates counter that strong fiduciary duties protect savers and should not be weakened. They favor expanding low-liability options, like state auto-IRAs, while keeping high standards for 401(k)s.
What to Watch Next
Plan providers are ramping up turnkey offerings that bundle administration, investments, and payroll integration. Their pitch: a simpler path with predictable costs. Adoption over the next 12 to 18 months will test whether these models overcome liability concerns.
Lawmakers are also monitoring state auto-IRA growth and considering federal incentives to scale access. Any move to tighten or loosen fiduciary rules will draw strong reactions from employers, vendors, and worker groups.
The core trade-off is clear. Expanding access could help millions save more for retirement. But without more certainty on legal risk, many employers may hesitate. The next phase will hinge on whether policy tweaks and pooled structures can offer enough protection for companies while preserving safeguards for workers.
