What’s this? Legislative policy proposals that might actually help?
The Employee Benefit Research Institute likes what it sees in the current batch circling Washington.
The organization looked at requiring retirement plans for most full- and part-time workers, offering guaranteed income products for 401k and 403b plans, auto portability, allowing open multiple employer plans (MEPs) and modifying required minimum distributions (RMDs).
All would have would be net positive on retirement savings, coverage and income for the nation’s workers and retirees.
Immediate annuities
While drawing skepticism from certain quarters of the planning profession about the use of annuities in retirement plans overall, EBRI argues there is an overall positive impact in using half of 401k or 403b balances at age 65 to purchase an immediate annuity.
“The results vary with the simulated date of death, but overall, a single premium immediate annuity purchase amounting to 50 percent of 401k or 403b balances at age 65 would decrease average retirement deficits by $985,” according to EBRI.
Multiple-employer plans
Additionally, open MEPs would result in a “significant reduction in retirement deficits for those who would have spent a considerable portion of their work career without eligibility for an employer-sponsored retirement plan.”
Employees with the least amount of years of eligibility for an employer-sponsored retirement plan are projected to experience average reductions in their retirement deficits of 26.7 percent, EBRI adds.
Required minimum distributions
“The one-time impact on individual retirement account (IRA) distributions for those ages 71 to 100 under several combinations of increases in RMD life expectancy and/or increases in the start date of RMDs ranged from as small as 0.2 percent to as much as 8.4 percent.
Mandatory coverage
Expanding retirement plan eligibility by requiring a plan for all employers except those with fewer than 10 employees would make a substantial impact on employees ages 35–39.
Under the current system, EBRI projects that workers ages 35–39 will experience an average retirement deficit of $49,182. However, under a system that includes plans for all employers with at least 10 employees and all new plans are assumed to be auto-IRAs, retirement deficits for workers ages 35–39 decrease by 15.2 percent.
Were the auto-escalation cap for the auto-IRAs to be raised from 10 percent to 15 percent, the average retirement deficits are simulated to decrease by 17percent.
If, in addition to these provisions, all non-excludable employees are covered by the plan, the average retirement deficit for this cohort is simulated to decrease by 17.3 percent.
Auto portability
Lastly, EBRI also examined the impact of auto portability, whereby—upon employment termination—all defined contribution (DC) assets are temporarily held in a clearinghouse and then automatically combined with workers’ active DC accounts in a new employer’s plan.
If a full auto portability scenario is assumed on top of all of the aforementioned changes to the retirement system, the average retirement deficit is simulated to decrease by 27.1 percent.
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
