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Washington’s Answer to the Retirement Readiness Issue
Last Updated: March 31, 2014
Recently proposed budgets and legislation illustrate a trend, and the trend in Washington is retirement readiness. In 2014’s First Quarter, the notion of improving retirement readiness—both by making it easier for lower income individuals to save for retirement as well as by easing the burden on small employers in offering benefits plans—has been presented in budget and legislative proposals. This blog will summarize some of Washington’s key proposals, including those relevant provisions within President Obama’s proposed budget for 2015, Senator Collins’ and Nelson’s Retirement Security Act of 2014, and Senator Harkin’s USA Retirement Funds Act of 2014.
Obama’s Proposed Budget and MyRAs
For the 2015 fiscal year, President Obama resurrected a lot of the proposals that he introduced for the 2014 budget. He proposed limiting contributions to tax-preferred savings accounts once the accounts reach a $3.2 million threshold, doubling taxation on small business owners with contributions both when received and when a distribution is made, and limiting tax breaks for high income earners to 28% of income. He also included funding for his recently proposed MyRAs, a starter retirement account for low-income wage earners who do not have the opportunity to save through retirement with their employers. Obama has directed the U.S. Treasury to start a pilot program for these starter accounts with a projected start date in 2015. With these accounts, a Treasury security would be held in a Roth individual retirement account, and workers would be able to open an account with a $25 investment and save in the account up to a $15,000 threshold; the maximum contributions within a year being $5,000 (or $6,500 for persons 50 and older).
After the $15,000 threshold is met, a worker would have to roll the money over to an institutional Roth IRA. Moreover, the only task imposed upon employers would be that of facilitating the payroll deductions; there is no fiduciary liability or investment or administrative responsibility for employers who opt in to this program. Instead, the responsibility for the accounts would be on the Treasury-selected private-sector money management firm as well as the U.S. Treasury. Although there are quite a few questions left unanswered with this proposal (e.g., if the point is to encourage retirement savings why don’t these plans have an automatic enrollment function and will there be any underlying costs involved?), this proposal clearly illustrates a desire by Washington to encourage retirement savings.
Retirement Security Act (RSA) of 2014
On January 29, 2014 Senators Collins (R-ME) and Nelson (D-FL) proposed the Retirement Security Act (RSA) to ease the administrative burdens of operating a retirement plan by easing the restrictions imposed on multiple employer plan (MEP) arrangements. This bill allows for the joining together of plans by multiple employers despite the employers lacking a “common interest” currently required in MEP arrangements. The bill calls for the implementation of Treasury Regulations, which would serve to ensure that one participating employer’s qualification error wouldn’t risk qualification for the entire MEP. Only smaller employers with 500 or fewer employees would be able to participate in such arrangements. Employer participation and employee participation would be wholly voluntary. Ultimately, this MEP relationship would serve to reduce the administrative costs of operating a single employer plan.
Another aspect of this bill focuses on automatic enrollment safe harbor provisions. Currently, safe harbor auto enrollment provisions cap employee contributions at 10% and employer match at 6%. The bill will allow for employee contributions greater than 10% and will increase the match to up to 10% of compensation.
In addition to the MEP proposals, this bill intends to improve the opportunities for tax incentives for those low- and middle-income individuals. There currently exists a $1,000 tax credit ($2,000 for joint filers) for persons contributing to an IRA or employer-sponsored plan, but such credit cannot be claimed on the 1040EZ; the bill proposes to make it available to claim on the form.
This bill has a lot of working parts, some likely easier to implement than others. Irrespective of the practical difficulties involved with implementation, the general aspects of this bill illustrate some of the ways retirement readiness could be improved.
USA Retirement Funds Act of 2014
On January 30, Senator Harkin (D-IA) introduced sweeping retirement plan legislation, which would—among other things—establish a DOL-approved MEP arrangement run by independent trustees with lifetime income payment options.
The radical changes within this plan include mandatory employer participation in the USARF if the employer:
(1) Has 10 or more employees,
(2) Does not currently sponsor a retirement plan, or
(3) Sponsors either a frozen defined benefit plan, and/or
(4) Sponsors a defined contribution pension plan that fails to offer auto enrollment safe harbor and fails to offer lifetime income options.
This bill, if passed, would give 75 million people who don’t currently have access to work retirement plans, an opportunity to save and secure a lifetime pension benefit. There are a lot of parts to this bill and although many people are focusing on the complicated nature of trying to implement this sweeping legislation, this bill also illustrates how important retirement readiness is to those on the Hill.
Although none of these items may stick in their current form, these proposals show us where Washington’s head is with respect to retirement plans. Even if some of these proposals seem extreme or perplexing, there is some good that could be found within each of them. Retirement readiness is important, and it’s good to see that Washington is attempting to address the issue.
PCI’s archived blog entries are dated, the rules and statutes referenced may have changed. The analysis or guidance within these blog entries may have become stale, dated, or no longer accurate. PCI will not update or change these entries to reflect the latest analysis or development.
