by Jonathan Goudy / Retirement Planning
It is time to review the much heralded recommendations to improve retirement security and personal savings in the Bipartisan Policy Center’s (“BPC’s”) report on the future of retirement security (the “Report”). The recommendations track the six challenges we have discussed previously.
Improve Access to Workplace Retirement Plans
- Create Retirement Security Plans For Businesses Under 500 Employees
- Allow small employers to band together to form and join well designed and low cost, ERISA-protected, Retirement Security Plans (“RSPs”).
- RSPs would have safe-harbors to avoid discriminatory testing and would allow employers to delegate the fiduciary duties to professional managers, who would be certified and regulated by the Department of Labor (“DoL”).
- Enhance Automatic-Enrollment Contribution Safe Harbors
- Exempt employers from testing if they automatically enroll employees in a plan with a default contribution rate between 3 and 10 percent of pay.
- Employers could match up to 15% of pay, encouraging higher deferral rates by employees.
- Enhance the Existing myRA Program to Benefit Uncovered Workers – Treasury implemented myRAs in 2015 for part-time or low-paid employees. Report suggests codifying the myRA outside of ERISA and allowing automatic enrollment and employer contributions, easing the process for employers to adopt them.
- Introduce a National Minimum-coverage Standard to Pre-empt Disjointed State Standards
- Effective in 2020, after the changes to RSPs and myRAs have been implemented, employers with over 50 employees must offer an ERISA plan (401(k)) or automatically enroll employees into either an RSP or a myRA.
- Employers not wishing to adopt such a plan would simply forward contributions with their payroll taxes, to be segregated into a national or regional RSP.
- Encourage Plan Sponsors to Assist Participants in Allocating and Diversifying Investments – new safe harbor to limit legal liabilities for plans that automatically reallocate into qualified default investment alternatives that gradually adjust to a more conservative allocation over time.
- Allow Plan Sponsors to Establish Roth or Tax Deferred Default Treatment Depending on the Participant’s Tax Bracket.
- Create Lifetime Income Plans as a Solution to Shortfalls in Funding for Multi-employer (Union) Defined Benefit Plans – offer a solution to underfunded multi-employer plans that might default, making them more sustainable and reducing taxpayer liability for defaults. Benefits would be a monthly payment for life.
- Create a Private-Sector Retirement Security Clearinghouse to Help Individuals Consolidate Retirement Accounts and Assets – solve the problem of orphaned accounts at former employers and allow a more cohesive retirement network.
- Establish New Limits on Company Stock in Defined Contribution (“DC”) Plans to Avoid Investment Catastrophes
- Remember Enron? Too much employer stock can increase risk that major drops in retirement account value coincide with a loss of employment.
- Employees should be educated as to the risk and no more than 25% of any retirement account should be employer stock.
- Change Congressional Budgeting Rules to Use More Accurate, Longer Term Forecasts – official budget estimates limited to 10 years often overstate the impact of tax deferral of DC Plans because only the tax deferral is considered, not the later tax revenue when distributions occur.
- Promote Plan Adoption by Increasing New-Plan-Startup or Auto-Enrollment Tax Credits – increase the credit to $4,500 of Plan start-up expenses, but require automatic enrollment provisions be included.
- Change the Current Saver’s Credit to a Refundable Starter Saver’s Match to Incentivize Younger Savers – for lower earning workers aged 18-35, use a refundable (payable even with no tax liability) Starter Savers Match to match up to $500 contributions to a plan, with the match going directly into the plan.
- Establish an Overall Limit on Total Assets in Retirement Plans to Reduce Taxpayer Subsidies to Wealthy Americans
- The federal GAO estimates 1100 taxpayers have IRA balances over $10 million.
- Proposed that no more than $10 million (indexed for inflation) be allowed in tax-deferred accounts.
- End the “Stretch” IRA Technique – require non-spousal beneficiaries to distribute inherited retirement assets over a 5-year period, not their life expectancies. Accelerate payment of tax.
- Exempt Small DC Plans and IRA Balances (Up to $100,000) From Required Minimum Distribution Rules – simplify the process and preserve balances for emergencies.
- Exclude the First $25,000 of Savings in Retirement Plans from Means Tests for Public Support Programs – programs such as Food Stamps, Medicaid or SSI, are subject to means tests. Exempting the first $25,000 of retirement savings will encourage savings by many who most need the access to resources.
We will continue this review next time. I hope the reader appreciates the utility and practicality, yet creativity, of these recommendations by this expert Commission, despite this summary treatment. These ideas likely are a good representation (at least in part) of the future of retirement planning in the U.S. and are worthy of your consideration.
Remember, it’s not what you make that matters…it’s what you keep!
The general information herein is not intended to be, nor should it be treated as tax, legal, or accounting advice, nor can it be used for the purposes of avoiding tax penalties. Please seek advice from an independent tax advisor before acting on any information presented.