Both Congress and the White House want to increase access, coverage and participation in retirement savings plans. A recent study indicates that a majority of American households may not be able to maintain their standard of living after retirement and that the current private pension system is not working well enough to avoid the problem.
A Joint Committee on Taxation study identified several major impediments to retirement savings: lack of access to workplace plans; high costs of starting and maintaining plans, especially for small employers; low employee coverage and participation rates; the lack of lifetime income options; and the use of savings before retirement (known as leakage). Key policy goals to remedy these shortfalls include increased access, participation and contribution levels; reduced leakage of account balances; and the promotion of a greater number of lifetime income options.
The Obama Administration’s Fiscal Year 2017 budget includes a number of proposals to address these concerns. The Senate Finance Committee has held hearings on the problem and on potential solutions. The hearing highlighted the work of the Committee’s 2015 Working Group on Savings and Investment, which made a number of proposals regarding retirement savings. Both Republicans and Democrats have expressed a desire to address the problem on a bipartisan basis.
Multi-employer plans
The White House and Congress both support the use of open multiple-employer plans (open MEPs) to increase access to retirement plans. Unlike current law, open MEPs would be available to unrelated employers, without requiring the employers to have a “common bond.” These pooled retirement plans can offer retirement benefits with lower costs and fewer burdens than if employers had to offer separate plans.
Another proposal is to open retirement plan access to long-time part-time workers. The White House also proposed to offer tax cuts to employers that offer more generous plans or that provide automatic enrollment for their employees. In addition, the White House would like to increase the portability of retirement benefits so that employees can more easily move plan accounts and benefit as they shift jobs, and can consolidate workplace benefits with private IRA accounts.
Open MEPS would be particularly useful for smaller employers. These plans could offer automatic enrollment of employees with employee contributions, ease of movement between employers without having to move funds out of the MEP, and distribution options that include lifetime annuities. Participation could be limited to small employers (100-500 employees), who have the greatest coverage gap.
Greater participation
The White House has indicated that half of workers at firms with fewer than 50 people, and more than ¾ of part-time workers, have no access to retirement plans, compared to 89 percent of workers at larger firms that do provide retirement plans. The administration estimates that its proposals would provide an additional 30 million people with access to workplace plans.
Several states, as well as the federal government, have established or are considering automatic enrollment in IRAs. Oregon, for example, has initiated this benefit for people without employer-based accounts. Practitioners say it would make more sense for the federal government to provide a national plan, rather than to have 50 different plans operating at the state level. Some practitioners recommended that 401(k) accounts be made fully automatic for all workers instead of just new hires, and that auto-enrollment include a meaningful employee contribution rate.