Earlier this week, Pete Buttigieg became the latest Democratic presidential candidate to weigh in on the issue of retirement security when he proposed a government-run public 401k option that would be attached to Social Security as part of his “Dignity and Security in Retirement” plan released on his website.
“Mayor Pete,” the 37-year-old South Bend, Indiana mayor who has been rising in the polls (particularly in Iowa and New Hampshire), included the 401k option among other proposals intended to help every American be able to maintain a decent standard of living when they retire.
The highly detailed plan outlines how he would “fundamentally transform” the long-term care system (paid for by greater tax enforcement on the wealthy), preserve Medicare Advantage and allow seniors to choose among private health plans if they want (as opposed to “Medicare for All”), stabilize Social Security by adjusting tax rates for high earners, and require employers to have some “skin in the game” to help employees save for retirement.
“I am determined to usher in a new era for older Americans, one that empowers them to age and retire with dignity. One that equips them and their families with a sense of security over their futures, allowing them to see it as a time filled with possibility,” Buttigieg states on his website. “In this new era, we will uphold that unshakable promise that every American should be able to maintain a decent standard of living when they retire.”
The Public Option 401k
The last three pages of Buttigieg’s 19-page plan are devoted to outlining a “new Public Option 401k with employers’ skin in the game,” but without automatic enrollment.
Workers who do not currently have a defined benefit pension or a “robust 401k savings option” will be able to opt into the Public Option 401(k) to increase their nest eggs with an employer match, the plan states.
What follows is straight from the proposal (minus multiple footnotes):
The Public Option 401k is designed to complement Social Security’s vital bedrock by achieving three key goals: expanding savings for retirement with employer support, expanding savings for pre-retirement emergencies, and expanding worker benefits and options. The Public Option 401(k) both levels the retirement savings playing field—which currently works best for high earners—and also helps workers weather pre-retirement emergencies.
The Public Option 401k comes with the following features:
- Employer match: Every worker who chooses to opt in to the Public Option 401k will have two accounts: a Rainy Day Account and a Retirement Account. Under the baseline savings plan, the worker could opt in to contributing 1.5% of their pay into their Rainy Day Account—and that worker’s contribution would trigger an employer contribution of 3% of pay into the worker’s Retirement Account. A 3% employer contribution is approximately the average maximum employer match currently available in 401ks. Workers can make extra contributions to either account, dial down their contributions, or opt out at any time.
- Helps workers weather emergencies: Workers who opt into the Public Option 401k can access their Rainy Day Account funds at any time, for any reason, and with absolutely no penalty, even before retirement. Retirement Account funds must be saved until old age, unless a safety valve is triggered—for emergencies like disability, unemployment, or family medical emergencies, or for major life expenses like a house down payment or educational expenses. Limits on safety valve withdrawals will vary by income and will be capped for high earners, ensuring that workers, especially the most financially vulnerable, can access needed savings. For instance, right now a family making $30,000 a year who has an unexpected medical expense cannot take money out of their current 401k without paying a penalty. With the new Public Option 401k, they would be able to do so without penalty.
- High opt-in rates: While workers will be free to opt in to the Public Option 401k, the plan has two key attractive features that help ensure high rates of opting in. First, employees’ baseline contributions are always accessible from the Rainy Day Account: workers do not tie up a dime of their own pay. Second, the employer match is generous: whereas current employers tend to contribute only seventy cents for each dollar of employee 401k contribution, employers under the Public Option 401k will contribute two dollars. Public communication will make these features clear. As such, we expect the Public Option 401k to yield high participation rates over time even without automatic enrollment and while preserving a high degree of worker choice.
- Universal coverage: The Public Option 401k will first be available at large employers, while building toward a seamless, streamlined, hassle-free system for medium and eventually smaller employers. Employers will be exempt from the requirement to offer the Public Option 401k if they offer a defined benefit pension or a 401k or similar account with a sizeable employer match or otherwise successful and generous retirement package instead. Guardrails, such as a special maximum contribution limit in the Public Option 401k like in current SIMPLE plans, will further protect current 401k plans. Workers can take their Public Option 401ks with them from job to job and retain their opt-in choice from a previous job.
- Extremely low fees: Workers are routinely robbed of hard-earned retirement savings by high 401k fees. Public Option 401ks will be invested in broad-based funds with fees that are required by law to be nearly zero, like those in the Thrift Savings Plan, which is negotiated by the federal government and available to members of Congress and other federal workers.
- Safe and smart investment: Retirement Account dollars will be defaulted into life-cycle index funds that combine stocks and bonds in proportions that vary with a worker’s age. Workers who prefer different allocations for their savings will have other low-cost, safe options, as well. Rainy Day Account dollars will be invested in safe money market funds.
- Tax benefits available to the working- and middle-class: The millions of working and middle- class families without a 401k currently do not enjoy its tax benefits. The Public Option 401k’s Retirement Account will have all the tax benefits of a 401k, either traditional or Roth.
- Simplicity: The Public Option 401k provides an easy savings option for workers and employers: Default asset allocations take out the guesswork for workers, and employers benefit from having an easy-to-use, off-the-shelf product to offer employees. An employer will go to a website, click a few buttons, and start contributing to the worker’s Public Option 401k via bank transfers or their payroll provider, just like direct deposits of workers’ wages.
- Optional consolidation: All workers will be able to seamlessly roll their prior 401ks into the Public Option 401k when they switch jobs so that at retirement, their savings are in one place. A portion of rollover amounts can go to the Rainy Day Account.
- Built on successful state programs: The Public Option 401k builds on similar programs in California, Connecticut, Illinois, Maryland, Massachusetts, New Jersey, Oregon, and Vermont. States like these with similar programs would keep their programs if they want.
- Effective: Under Pete’s proposal, a middle-earning American worker participating in full over their lifetime will be able to retire with over $500,000 in retirement savings.
Reasons for skepticism
Small businesses that don’t currently offer a retirement plan may find the Public Option 401k’s employer mandates a bit hard to swallow. That 3% match might well come out of employee salaries, for instance.
Another question would be how effective the plan would be at getting people to participate without auto-enrollment, like OregonSaves and many other state-run retirement plans require.
A Buttigieg spokesperson told Yahoo Finance that Buttigeig’s proposal is “uniquely well-positioned to ensure high enrollment even without auto-enrollment” given that the contributions go first into a rainy day fund that can be withdrawn at any time without penalty.
Veteran financial services industry journalist Brian Anderson joined 401(k) Specialist as Managing Editor in January 2019. He has led editorial content for a variety of well-known properties including Insurance Forums, Life Insurance Selling, National Underwriter Life & Health, and Senior Market Advisor. He has always maintained a focus on providing readers with timely, useful information intended to help them build their business.
