Saving for Retirement

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Retirement savings ideas from Washington are a mixed bag

May 20, 2013

Ideas to expand or improve the nation's retirement system are getting more attention in Washington, D.C.—but the latest proposal, part of the recently announced White House budget that would effectively put a cap on retirement assets, is seen by some as running counter to long-held tenets to save as much as possible for retirement.

Bill McNabbIn an April 10 online interview, Vanguard Chairman and CEO Bill McNabb questioned the proposed cap on IRAs and other tax-preferred retirement accounts. (If the proposal were enacted today, individuals would be barred from making contributions to any retirement accounts, including regular or Roth IRAs, or accruing more in a defined benefit plan, once those combined assets exceeded $3.4 million.)

"Anything that disincentivizes people from retirement savings is not a good idea," Mr. McNabb told The Wall Street Journal. Especially with existing limits to the retirement plan system, and when "Social Security and Medicare are really not sustainable in how they've been constructed," he said, "we should be doing everything we can to incent people to use the retirement system more aggressively."

While the Obama administration's budget estimated that a cap on tax-advantaged accounts would generate $9 billion over ten years, Mr. McNabb suggested that the way costs and benefits of the retirement system are currently calculated are "pretty flawed."

"Retirement plans end up looking like one of the big costs from a tax perspective," he said. "If you look at the whole life cycle, all you're talking about is a timing difference between when the money goes into a plan and when the money comes out (and gets taxed). And when you take the net present value of that, it's a much smaller tax (cost), if you will."

Ann CombsThe details in the proposed cap are extraordinarily complicated, said Ann Combs, who leads Vanguard Government Relations. Ms. Combs said it would require individuals to aggregate, and then convert to annuity form, all of their defined contribution accounts, IRA accounts, and defined benefit accruals, and then to compare that with a permitted total annuity amount that fluctuates with age and interest rates.

Congressional interest in the proposal appears to be limited, at least for the time being, Ms. Combs said.

Congressional proposals to cover more workers

Meanwhile, several proposals are being floated in Congress to expand retirement savings for workers who don't have access to a plan, but are currently stalled because of partisan disagreement and deficit concerns. Vanguard government affairs leaders note, however, that action at the state level could eventually push forward a federal effort.

James DelaplaneThe legislative activity is further evidence that retirement plan coverage and readiness is a public care that has gathered interest in the political realm, said James Delaplane of Vanguard Government Relations office. "Lawmakers recognize that not as many people as they would like have access to a workplace savings vehicle," Mr. Delaplane said. "Coverage probably remains the most high-profile retirement policy issue that legislators are interested in."

In Congress, two leading coverage proposals have been advanced. The first, a newer Democratic-led initiative, would require employers who don't offer retirement plans to enroll workers in and make contributions to new "USA Retirement Funds," which would likely consist of target-date funds that pay out a pension-like annuity. The second, the longstanding automatic IRA proposal promoted by President Obama, would require employers without plans to automatically enroll their employees in IRAs.

Investments in target-date funds are subject to the risks of their underlying funds. The year in the fund name refers to the approximate year (the target date) when an investor in the fund would retire and leave the workforce. The fund will gradually shift its emphasis from more aggressive investments to more conservative ones based on its target date. An investment in a target-date fund is not guaranteed at any time, including on or after the target date.

Because both proposals represent new mandates on business, they are not likely to find enough current support among Republicans to gain passage, Mr. Delaplane said.

Ms. Combs said the deficit and debt debate affects new efforts on retirement plans as well. "Expanding coverage actually costs revenue, and in this kind of environment, legislative proposals that come with a price tag have a very high hurdle to overcome because they have to be paid for," Ms. Combs said.

The USA Retirement Funds concept

The USA Retirement Funds idea, yet to be written into bill form, is advocated by U.S. Sen. Tom Harkin, D-Iowa, who has called for the creation of privately run retirement funds for employers who do not currently have defined contribution (DC) or defined benefit (DB) plans, or a plan that does not offer what the law would define as adequate employer contributions. Under Harkin's idea, the USA Retirement Funds would manage retirement assets on behalf of workers and pay an annuity based on each worker's contributions.

The funds would be overseen by independent boards of trustees, which would include employee, retiree, and employer representatives who would act as fiduciaries. Employers would not be required to guarantee the funds nor be responsible for making up an actuarial shortfall, as is required under similar DB plans.

Ms. Combs indicated that Sen. Harkin, who is not running for re-election in 2014, would need to drop the imposition of the mandate in order to muster Republican support. "It would have to be a bipartisan agreement, and there's no way that will happen with an employer mandate," she said.

Automatic IRA proposal

The proposal for automatic IRAs has been included in President Obama's previous proposed budgets. The idea has bipartisan roots, as it was initially floated in 2006 by researchers at the conservative Heritage Foundation as well as the left-center Brookings Institution.

Automatic IRAs would require employers without retirement plans to automatically enroll workers in payroll-deduction IRAs, with the money invested in qualified default investment alternatives (QDIAs), such as target-date funds. Employers would be prohibited from contributing to the IRAs. Employers would not be required to comply with ERISA rules, maintain trusts, determine eligibility, select investments, or even set up the IRAs. The measure had been previously introduced in Congress but was not voted on.

States may break the logjam

Congressional members are not the only ones debating the issue of retirement plan coverage. Mr. Delaplane said that more action on the issue in state capitals may eventually spur action in Washington.

"The trend line has been for more coverage-related legislative activity at the state level. More such proposals are moving toward the finish lines," Mr. Delaplane said. "Over time, the state activity could change the nature of the federal debate. More and more retirement industry stakeholders may ask themselves, 'If I have to deal more and more with state coverage requirements, then maybe it makes sense to embrace things like automatic IRA at the federal level instead.' A uniform federal initiative might be structured to preempt a lot of these state efforts."

Since 2006, more than a dozen states have considered legislation that would provide some form of private-sector retirement savings overseen by public officials or a public entity, such as a state pension plan. Only California and Massachusetts have passed legislation. California is studying their plan for its viability and the Massachusetts bill applied only to nonprofits with fewer than 20 workers. The effort has, for now, died in most of the other states.

Notes:

  • All investments, including a portfolio's current and future holdings, are subject to risk, including the possible loss of the money you invest.
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