In his State of the Union address, President Obama said Americans should have the ability to save for retirement at work–and the ability to take their savings with them as they move from job to job. While Social Security remains a rock-solid guaranteed benefit that every American can rely on, Americans are increasingly responsible for their own retirement security.
The President’s proposals – which will be detailed further in his FY2017 Budget–aim “to ensure near universal access to workplace retirement savings accounts. Specifically, the new rules would make it easier for small businesses to join together to form 401(k) retirement plans for their workers, even if the businesses are in different industries. Goal released by the administration last week include:
- Expand access to workplace retirement savings opportunities by encouraging more employers to offer plans and making it easier for workers to participate:
- Enabling small businesses to come together and create pooled 401(k) plans, at lower cost and with less burden than going it alone;
- Automatically enrolling workers without access to a workplace plan in an IRA;
- Providing tax credits for small businesses that begin offering retirement plans, or choose to automatically enroll workers in existing plans; and
- Allowing long-term, part-time workers to participate in their employer’s plan.
- Provide a path forward to more portable retirement benefits by:
- Piloting innovative, more portable approaches to provide retirement and other important employment-based benefits;
- Evaluating existing portable benefits models, and examining the feasibility of greater change; and
- Helping workers find lost or missing retirement accounts from prior jobs.
- Build on existing efforts: The Administration has facilitated state efforts to create their own retirement savings options for their citizens, without running afoul of federal law; launched myRA, a simple, safe, no-fee, and portable savings option; issued guidance making it easier for employers to accept rollovers from other 401(k)s; and proposed rules to ensure retirement advisers make recommendations in their customers’ best interest.
Expanding Access to Workplace Retirement Accounts
The plan claims one out of three workers does not have access to a retirement savings plan, including half of workers at firms with fewer than 50 employees and more than three-quarters of part-time workers. In addition, contractors and temporary employees are often unable to participate in employment-based plans. Workers without access to a plan at work rarely save for retirement: fewer than 10 percent of workers without access to a workplace plan contribute to a retirement savings account on their own.
The President’s proposals would provide more than 30 million people with access to workplace retirement savings options. The proposals would encourage and enable more employers to offer plans such as a 401(k), while creating alternative savings arrangements so workers can save for retirement at work even if their employer does not offer a plan.
- Make it easier for employers to create pooled 401(k) plans to lower cost and burden. Multiple employer plans (MEPs) already allow employers with a “common bond” to form a pooled retirement plan, offering benefits through the same administrative structure but with lower costs and less compliance burden than if each employer offered a separate plan. In his upcoming Budget, the President will for the first time propose to remove the “common bond” requirement, enabling employers to take advantage of “open MEPs” while adding significant new safeguards to ensure workers are protected. As a result, more small businesses should be able to offer cost-effective, pooled plans to their workers, and certain nonprofits and other intermediaries will be able to create plans for contractors and other self-employed individuals who don’t have access to a plan at work. As an added benefit, if an employee moves between employers participating in the same open MEP, or is an independent contractor participating in a pooled plan using the open MEP structure, he can continue contributing to the same plan even if he starts work for a different company.
- Provide tax cuts for businesses that choose to offer more generous employer plans or switch to auto-enrollment. The President not only wants to make it simpler for small businesses to offer plans, but also more cost effective for them to do so. That’s why the President will again propose in his Budget to triple the existing “startup” credit, so small employers that newly offer a retirement plan would receive a tax credit of $1,500 per year for up to three years – likely enough to offset administrative expenses. And because auto-enrollment is the most effective way to encourage workers with access to a plan to participate, small employers that already offer a plan and add auto-enrollment would also get a tax credit of $500 per employer per year for up to three years.
- Expand retirement savings options for long-term, part-time workers. Recognizing that part-time workers are much less likely to have access to a retirement plan, in part because employers are allowed to exclude them from participation, the President will again propose in his Budget to require that employees who have worked for an employer at least 500 hours per year for at least three years be eligible to participate in the employer’s existing plan. This simple change would provide an additional one million people with access to retirement plans, and come at minimal cost to employers, as they would not be required to contribute.
More complete details of the plan can be found here.
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.
