All of sudden, there’s a flurry of activity in the Capitol to help Americans save for retirement and for emergencies. Seven bills in the Senate and the House — some of them bipartisan — have recently been introduced. And the House Republican leadership is crafting what it calls “Tax Reform 2.0,” which would include retirement savings reforms as well as making last year’s tax cuts permanent; they’re not working with Democrats on this, however. So far, the Trump administration has been less enthusiastic about boosting Americans’ savings; it ended Obama’s MyRA retirement-savings program, for example.
If the bills wending through Congress pass later this year or in 2019 — a very big “if” — they could amount to the biggest changes in workplace retirement savings plans since 2006, as well as the first time Washington has addressed the public’s lack of emergency savings. And if the Democrats take the House in the November election, retirement reform will likely be the top priority for the ranking Democrat on the House Ways and Means Committee, Richard Neal, of Massachusetts, his aides have said.
The Washington Post recently noted that one of the major retirement bills being floated— the Retirement Enhancement and Savings Act or RESA — “could add millions of people to the rolls of tax-deferred retirement accounts.”
Help to Stem Americans’ Savings Crisis
Helping workers save for retirement could go a long way to lessen the retirement crisis in America. One reason so few people have so little saved: only about half of private-sector employees have access to employer-sponsored retirement plans like 401(k)s. Retirement plans at small businesses are even less common; the number of uncovered workers at businesses with fewer than 50 employees is nine times that of uncovered workers at large companies, The Washington Post recently noted.
Legislation under discussion aims to change all of this, and a bipartisan pair of Senators (Cory Booker of New Jersey and Todd Young of Indiana, a Democrat and Republican respectively) have called for a blue-ribbon panel to boost retirement security in America.
Referring to the retirement-savings legislation backed by a bipartisan group of Senators — Democrats Booker and Heidi Heitkamp (N. D.) and Republicans Tom Cotton (Ark.) and Young — the co-chair of the Bipartisan Policy Center’s Commission on Retirement Security and Personal Savings, James B. Lockhart III, said: “These commonsense proposals will greatly help people save for their future and retire with dignity.”
Here’s a rundown of five things the bills — many of them supported by financial services firms, AARP, economists and public policy think tanks — would do (apologies in advance for all the Washington acronyms below):
1. Allow for “rainy day” workplace savings programs, akin to 401(k)s for emergencies. This idea is being pushed by House Republicans like Kenny Marchant of Texas and the bipartisan group of Senators noted above, with their Strengthening Financial Security Through Short-Term Savings Act.
The short-term savings plans, sometimes called “sidecar” accounts, would let employers automatically enroll workers to build up tax-free earnings and get cash if, for instance, their car broke down, the roof began leaking or they were socked by a surpise medical bill. And these accounts would prevent workers from tapping retirement plans to pay for emergencies.
“By giving the green light for employers to automatically enroll their workers into short-term savings accounts, this bill [the bipartisan Senate one] has the potential to spur much needed innovation, experimentation and uptake,” said Ida Rademacher, executive director of The Aspen Institute Financial Security Program. “Today’s working families need new tools to meet the unprecedented short- and long-term financial challenges they face. Sidecar rainy day savings may well do both — by building up an emergency fund while simultaneously reducing the need for premature withdrawals from retirement accounts.”
David Newville, director of federal policy at the progressive think tank Prosperity Now, and The Aspen Institute’s David S. Mitchell, recently wrote on Medium that adopting rainy-day savings accounts “will not just help employees cope with emergencies and build economic security, but could also boost businesses’ bottom lines.”
In its recent paper Roadmap for Improving U.S. Retirement Savings: Make It Easier, the retirement experts at BlackRock (the world’s largest asset manager) said they support “the inclusion of emergency savings solutions in the retirement savings dialogue.”
2. Make it easier for small businesses to offer retirement plans to workers. “Many small employers are reluctant to offer [retirement] plans to their employees because of concerns regarding potential fiduciary liability as well as administrative complexity, burdens and costs,” the BlackRock report said. Broadening 401(k)s to small business employees is a key component of RESA, sponsored by Orrin Hatch (R-Utah), head of the Senate Finance Committee, and Ron Wyden of Oregon, the ranking Democrat on that committee. And the bipartisan group of Senators noted above have a similar bill.
The legislation would make it easier for small businesses to band together and jointly offer retirement plans to their employees through what are known as Multiple Employer Plans or MEPS. Currently, small businesses must be in the same industry or sector to share a MEP. But the new bills would eliminate that requirement.
Broadening MEPS, an idea which has been kicking around Congress for a while, has widespread bipartisan support as well as the backing of many retirement authorities such as Alicia Munnell, director of the Center for Retirement Research at Boston College.
The small-business retirement plan bills would also simplify the process for automatically enrolling 401(k) participants, as happens at many big firms. And the RESA bill would encourage small businesses to set up retirement plans by increasing the size of the annual federal tax credit for doing so, from $500 to as much as $5,000 for three years. Raising the credit, says Jamie Hopkins, retirement income program director at The American College of Financial Services, “is a great idea to incentivize and encourage plans.”
3. Let people contribute to traditional Individual Retirement Accounts (IRAs) after they turn 70 ½ if they’re still working. Today, they can’t. And they also need to start taking distributions from their IRAs once they hit 70 ½. (With Roth IRAs, there is no age 70 ½ contribution limit or required minimum distributions.) Congress is considering letting people over 70 ½ with earned income contribute up to $6,500 a year in either a traditional IRA or a Roth IRA.
Hopkins says lifting the age ceiling on traditional IRAs makes sense; after all, many people are living and working longer than in the past. But he thinks a better idea would be to remove the current income phase-out range for Roth IRA contributions; that way, any worker over 70 ½ could still contribute to a Roth IRA.
4. Let more workers invest some of their 401(k) money in annuities to deliver guaranteed, steady retirement income for life. Today, very few employers offer this option, largely because they don’t want the liability if the insurer behind the annuity goes belly up or can’t make its promised payments. The legislation would take employers off the hook.
Hopkins supports having more annuities for 401(k) savers, but doesn’t think this legislative change would broaden their availability very much. “There is still a huge negative perception around annuities that likely won’t be overcome by a simple liability protection,” he says.
5. Translate retirement savings into retirement income. The RESA bill would require employee benefit statements to include monthly estimates of the income employees’ 401(k)s might deliver with an annuity, not just their total account balances. That information could be a huge help for retirement planning. The BlackRock 2018 DC Investor Pulse Survey found that 93 percent of plan participants are “looking for guidance on annual and monthly retirement income.”
Hopkins says “there is a huge benefit to showing people the income their savings can generate.”
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