401k plans are getting a lot of love from Senators on Capitol Hill, as they state their cases for proposed retirement reform bills.
On the Senate Floor, Senators Rob Portman (R-OH) and Ben Cardin (D-MD) spoke about their bipartisan Retirement Security & Savings Act (S.1431), a broad set of steps designed to strengthen Americans’ retirement security that was proposed on May 14.
Iowa Senator Chuck Grassley, chair of the Senate Finance Committee, also called on his colleagues to update the country’s retirement savings laws during a committee hearing May 14.
Grassley, along with Finance Committee Ranking Member Senator Ron Wyden (D-Ore.), introduced the Retirement Enhancement and Savings Act of 2019 (RESA) last month, which he said was based on the “best ideas” from proposed retirement bills in the past several years. RESA mirrors the House’s bipartisan SECURE Act, which is expected to a be voted on by the full House of Representatives on Thursday.
Grassley noted retirement plans are one of the few options available to workers wishing to plan for their future, and the retirement system must be updated regularly to keep up with changes in the economy.
“The workplace retirement system is the primary way American workers save for retirement, whether through a defined benefit pension plan or an employer-sponsored defined contribution program,” Grassley said during the hearing. “And while defined benefit plans remain an important part of our overall retirement system, defined contribution plans—401k plans and similar programs—are now the primary means for private sector workers to save.”
Among other things, the RESA legislation would reform multiple employer plans (MEPs), which allow several small businesses to sponsor a retirement plan together for their employees.
The bill also includes provisions to enhance the transfer process for 401ks when workers change jobs.
“Workers with access to a retirement plan has reached 66% in the private sector, with over 75% of workers with access to plans actually making contributions toward their retirement. Since 1984, the number of 401k plans has grown from 17,000 plans to just over a half-million plans, covering over 60 million active participants,” Grassley said. “By any measure, the growth in these plans and the dollars saved are a success. But we need to do more to encourage and facilitate retirement savings.”
Portman praises the 401k
Portman and Cardin’s Retirement Security & Savings Act expressly seeks to help small businesses offer 401ks and other retirement plans, as well as expanding access to retirement savings plans for low-income Americans without existing coverage.
In his remarks on the Senate floor May 15, Portman said he and Cardin both support the RESA legislation strongly, but said their new bill builds on it and “expands it pretty substantially.”
Portman said they’ve spent 18 months developing the legislation, and have heard from stakeholders including AARP, the U.S. Chamber of Commerce, the American Benefits Council and others who all support it.
“Because we took the time and went to them and said, ‘Hey, what do people really need right now to expand their choices in retirement to be able to save more?’ We came up with four or five different challenges in our current retirement system and then specific proposals to address those,” Portman said.
One is the aging Boomer population which is not saving enough for retirement. Second, he said, is a lack of access to employer-sponsored plans.
“So you want everybody who is in the workplace to be able to have access to a 401k, and yet when you look at this, particularly with smaller businesses, a lot of people just don’t have access, don’t have the chance to save,” Portman said. “401ks are great because remember the employer typically puts a match in for you so it’s not just your money that’s tax advantaged, but you also, unlike an IRA, you get the employer to put a match in and usually to help you with your decisions in terms of what kind of investments you make with that 401k.”
Third, Portman said there is a real issue with the lack of savings, particularly with lower-income Americans. Finally, he mentioned the problem of inadequate lifetime savings.
“A lot of people have a 401k or IRA and they stop working. They think this is great and they take the lump sum. Maybe spend some of that, maybe buy the boat, maybe go on a nice vacation and then suddenly find, ‘Oh my gosh, I’m living longer and longer, I hadn’t expected to be in my 90s and still here,’ and yet that’s the trend right now.”
Portman’s comments on key provisions
The new bill includes 57 different provisions intended to address the aforementioned four areas. Portman touched on several of them on the Senate floor while providing highlights of the bill to colleagues. Among them?
- Increases the age for the required minimum distribution (RMD) from age 70.5 to 72 in 2023 and to 75 by 2030 (RESA only sought to raise the RMD to age 72).
“Why is that important? For those of you who are not in retirement, you may not know that there is a rule that says you’ve got to start taking your money out of retirement at 70 and a half. If you’re like my father who was working full time at 70 and a half, it was a head scratcher. Why should I take my money out of my 401k when I’m still working?” Portman told the committee.
(SEE ALSO: New Bill Means Major Increase in RMD Age)
“This makes no sense,” he continued. “So what we’ve said is, we’re going to kick it up to 75 years old but also, if you have less than $100,000 in your retirement account, you’re not subject to the minimum requirement rules at all. This is a great relief to a lot of seniors who are trying to save that money for retirement, don’t want to pull it out, because although they may work until age 75, they still know they’re going to have maybe another 20 years to live and they want to make sure they have that retirement savings in there.”
- A special catchup contribution allowance for people over age 60, meaning contribution limits go from $6,000 to $10,000 for workers over 60 with a 401k.
“It’s not just being able to get a catchup contribution. What we tell employers, ‘Hey, if you set up a plan that allows you to match 6% of pay rather than 3% of pay, we will give you a break from some of the onerous retirement rules in a safe harbor,’ and that will encourage more of those employers do it and it also provides a tax credit for those employers to offer these safe harbor plans,” Portman said.
- A provision to help employees struggling to pay off student loan debt.
“So this is people who are saying, ‘I would love to save for retirement, how can I do that when I have this student loan debt to pay off?’” Portman said. “What we do here is we say that employers will now be able to make a matching contribution to the employee’s retirement account in the amount of his or her student loan payment,” Portman said. “It’s also a good way to attract employees. If you’re a business owner out there you will like this because it will give you an advantage in the marketplace saying, ‘Come work with me, we’ll help you on the student debt.’”
- Increases the tax credit for small businesses starting a new retirement plan from $500 to as much as $5,000, and establishes a new three-year $500 per year tax credit for small businesses that automatically reenroll plan participants at least once every three years.
“The bill takes a number of important steps to help small businesses offer 401ks and other retirement plans for their workers,” Portman said.
Regarding auto-enrollment, Portman noted it is legislation he and Cardin first promoted back in 2006.
“[It] said to employers, ‘You can do an auto enrollment’ and the participation rate went from 75% to about 95%,” Portman said. “If you’re just told, ‘hey unless you do something you’re going to automatically be enrolled in this 401k,’ it encourages them to get into retirement savings… We think it’s going to make a big difference.”
- Expands the eligibility of 401ks to include part-time workers.
“It allows part-time workers who complete between 500 and 1,000 hours of service for two consecutive years to be able to join in with a 401k,” Portman said, adding this issue is particular importance to AARP, which is dismayed that only 22% of part-time workers currently participate in a 401k.
With the 57 different provisions, there are obviously dozens more included in the Retirement Security & Savings Act.
“Again, these are all common-sense reforms,” Portman concluded in his remarks to the committee. “They deal with all four of these challenges that we’ve seen as we’ve looked at the retirement system based on a lot of input from a lot of people. My hope is we’ll be able to get this done.”
SEE ALSO: Retirement Bill Creates Match for Workers Repaying Student Loan Debt
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.
