How Washington Is Eroding Retirement Security
Why this analyst says two recent actions are cause for concern
What are Congress and President Trump doing to ease the fears of Americans fearful that their standard of living will fall in retirement? Actually, Washington is taking two steps that could erode retirement security.
And that’s happening at a time when 88 percent of Americans believe the nation faces a retirement crisis and 85 percent say leaders in Washington don’t understand how hard it is to prepare for retirement. Those results are from a new survey from the National Institute on Retirement Security (NIRS).
Stalling Retirement Plans and Fiduciary Rule
Yet here’s what’s been happening in D.C.:
- Congress is in the midst of repealing an Obama administration rule change that would have made it easier for states to create retirement plans for workers without access to employer-sponsored plans. Yet Americans want these plans. The NIRS survey found that 75 percent of Americans believe such plans are a good idea and 81 percent said they'd consider participating in them.
- The White House is preventing the “fiduciary rule” for retirement investors from taking effect in April, either delaying or possibly killing it. (This Obama administration rule would require brokers and advisers who manage retirement accounts to put clients’ interests before their own.) The Department of Labor just issued a proposed rule seeking a 60-day delay, following the president’s order to “examine” the fiduciary rule “to determine whether it may adversely affect the ability of Americans to gain access to retirement information and financial advice,” directing the agency to move forward with “rescinding or revising the rule.”
I’ll get to more about both momentarily. But did you notice that there was no mention of retirement during the president’s recent address to Congress? Nor does there seem to be any sense of urgency from the new administration to improve America’s tattered retirement savings system.
The stakes are high.
The Retirement Security Stakes
We know that the American population is aging, and longevity is increasing, on average. Some 10,000 boomers reach age 65 daily and the 65+ age group will increase by half over the next 30 years, according to a Merrill Lynch/Age Wave report. At the same time, average life expectancy at birth is up to 79 years with projections that it will rise by nearly two years per decade.
Aging America isn’t financially prepared for retirement. The Center for Retirement Research at Boston College calculates that about half of private-sector employees (55 million workers, mostly at small businesses) lack access to an employer-sponsored retirement savings plan such as a 401(k). And the Government Accountability Office reports that about half of households 55 and over have no retirement savings
“If current trends continue, the U.S. soon will face rates of poverty among senior citizens not seen since the Great Depression,” write the authors of the National Institute on Retirement Security report.
So now let’s turn the focus to Washington.
Stymying State-Sponsored Auto-IRAs
The House recently overwhelming voted to effectively slow, if not stop, the movement by states to offer auto-IRAs to private-sector residents whose employers don’t offer retirement plans (230 Republicans and one Democrat). Seven states, including California, Illinois and Maryland, are in the process of creating such government-sponsored plans; 30 more have been considering doing that, according to AARP, an advocate for them.
The House did this by approving a bill to invalidate a Department of Labor rule that would have exempted state plans from a key federal law and reduced state-government concerns about compliance costs and liability. The Senate is expected to follow suit shortly.
Here’s how California’s upcoming Secure Choice auto-IRA plan will work: Employees at firms with five or more workers without employer-sponsored plans will be automatically enrolled in a payroll-deduction plan (they could opt out). If an employee doesn’t select a contribution amount (2 to 5 percent of pay), 3 percent will automatically go into a professionally managed account. Employee contributions escalate in 1 percent a year increments, up to 8 percent of salary (unless the worker opts out). There is no employer match.
You may be surprised to learn that much of the financial services industry has been deeply opposed to these state initiatives.
Economist Dean Baker, co-director of the liberal Center for Economic and Policy Research, captures the reason for their opposition: Fees. The average fee on 401(k)s is around 1.0 percent of the money in a worker's account. In sharp contrast, the state-sponsored plans are likely to charge fees of around 0.2-0.3 percent. “The difference can easily come to $30,000 over the course of a middle-income worker's career,” says Baker. “This is money that is being transferred from workers to the financial industry.”
Opposing the Fiduciary Rule
Powerful segments of the financial services industry don’t like the fiduciary rule either. Some of those critics are now part of the Trump administration.
For instance, Gary Cohn, a former Goldman Sachs executive who’s now head of the White House National Economic Council, told The Wall Street Journal he thought the fiduciary standard was “a bad rule.” He went on to say: “This is like putting only healthy food on the menu, because unhealthy food tastes good but you still shouldn’t eat it because you might die younger.” Seriously?
401(k)s In the Crosshairs?
Another cause for concern: Washington seems to be targeting 401(k)s as a way to raise revenue.
The Employee Benefit Research Institute recently held a conference called Retirement Policy Directions in 2017 and Beyond and its report said that because of the “drive to simplify and lower income tax rates, tax-favored retirement provisions in the tax code are vulnerable… As one of the top sources of ‘revenue foregone’ by the federal government, ending or reducing current tax breaks for employment-based retirement plans (particularly 401(k)s) would free up revenue for other things the new Congress and president want to do.”
Think about that.
A Few Hopeful Signs
Taken altogether, you can see why I’m worried. However, there are a few countervailing forces to keep in mind.
The states embracing auto-IRAs believe they can still enact their plans, although adoption will be slow since they’ll have to go through additional legal hoops and it’s possible that some states will decide setting up the plans is not worth the trouble.
And the Senate Finance Committee last year backed tax credits to reward small businesses offering workers retirement plans. If that idea becomes law, it could help expand access to retirement savings for small business employees.
But for now, workers seem to be forgotten Americans when it comes to ensuring their retirement security.