Going on two weeks ago by now, on April 4th, Senators Chris Coons (D-DE) and Amy Klobuchar (D-MN) introduced new legislation, the Saving for the Future Act, which proposes to take the experiments in auto-enroll IRAs undertaken at the state level in Oregon, Illinois and California, and roll it out nationally. I read through the fact sheet made available at the time as well as additional reporting by CNBC, identified a number of questions the answers to which would make a significant difference in evaluating the legislation, and waited for the text to come out.
I’m still waiting. So while I’m waiting, here, at least, is the information its sponsors have provided, and the reasons why it’s especially true here that the devil’s in the details.
Under the proposal, all employers with more than 10 employees would be obliged to contribute a minimum amount to an employee savings/retirement plan; this would be set at 50 cents per hour worked upon implementation, then would increase to 60 cents in two years, and increase with wage growth thereafter. For businesses with fewer than 100 workers, this would take the form of contributing via payroll deduction to”UP accounts” established on their behalf and run by the federal government. (“UP”, according to the Third Way description but not, so far as I can tell, the fact sheet itself, stands for Universal Personal.) For larger businesses, the fact sheet doesn’t specify the form any such savings/retirement account would take. Employees working at the smallest firms would have the option to enroll in such accounts on their own. Also, part-time workers would be included in the program but independent contractors would participate on an individual basis only.
To partially offset the cost, employers would receive a tax credit equivalent to the cost of 50% of the minimum contribution for the first 15 workers, and 25% for the next 15. Workers participating as individuals, whether because their employers are too small to be mandated to participate, or because they are self-employed/independent contractors, would also receive this credit, up to a maximum of $1,000. To pay for these credits, the corporate tax rate would be increased from 21% to 23% and the top marginal individual income tax rate would be increased from 37% to 39.6%.
The first $2,500 in savings would be directed to a savings account; as soon as the balance exceeds this amount, additional contributions are directed to a retirement account.
Even though the employer contribution is fixed at a minimum dollar amount, workers themselves would be autoenrolled as a percent of pay, starting at 4% and increasing to 10%, with the option to opt-out or select an alternate contribution level.
Government-run “UP Accounts” would have maximum employee contribution levels set at half that of 401(k) plans. The accounts’ administration would be contracted out to a financial services company with target date funds.
Upon retirement, participants would be able to annuitize their benefits into a lifetime benefit or an annuity-certain (say, until the Social Security Late Retirement Age), or take “automatic, regular withdrawals equal to a certain percentage of their account balance.”
So, yes, I have questions:
The fact sheet says that employers with fewer than 100 employees would participate in the federal “UP Account” program. Does this mean that all employers with greater than 100 employees will be required to offer a retirement account from among the “menu” of retirement accounts now on offer, which means, by and large, a 401(k) account? Would this legislation simultaneously amend 401(k)-related laws to permit the structure of directing the first $2,500 to a savings account (known in the expert jargon as a “sidecar” account and only in existence now in a sort of jury-rigged format until legislation formalizes their structure)? Would self-employed workers be able to collect the $500 credit without participating in the “UP Account” system, but retaining an IRA instead?
In either the fed-administered or the employer-run version, what would the tax treatment be of this emergency fund? Would the overall retirement savings fund function like a traditional or a Roth IRA, or would participants be able to choose?
Would there be requirements for demonstrating hardship in order to withdraw from the savings account or are the reasons specified (car accident, family leave) merely examples? How quickly could they withdraw the cash? Would the savings account portion of the program be invested in a risk-free manner?
What would the administrative costs of such a plan be, and who would pay for them? Would the government provide start-up funding or expect the administrative services provider to swallow the initial costs? Would there be an expense load applied to the savings account that, at today’s low interest rates, might be greater than the interest earned? How expensive is it to manage the accounts of people working few hours or entering and leaving the workforce often? How would the management company’s expense charges be monitored?
Would participants receive any guidance on how to decide how much to save, especially those who are low-income and struggling simply to stay out of debt? How easy would it be for them to opt out or change their contribution rates?
Would the annuities for plan draw-down be private-sector or underwritten by the federal government? If the latter, how would the amounts be determined? Would participants be locked into these restricted account-withdrawal formats rather than taking larger lump-sums? Would this be true only of “UP Accounts” or would restrictions apply to the new retirement savings that larger employers will be mandated to provide?
What does the overall system cost look like in dollar amounts? How much is due to the tax credits to employers (which strike me as a bit peculiar when the system functions as, essentially, a mandated wage hike, and yet proponents of actual minimum wage hikes show no similar interest in the effect on employers) and how much due to the $500 credits to individual contractors/the self-employed?
This all seems like nit-picking but it’s not.
The bottom line is this: the hope of making it easier for Americans to save for emergencies and for retirement is a worthy one. But there are so many ways it can go sideways that it’s really just not enough to say “we have good and worthy intentions and the details will all sort themselves out one way or another.” The details actually make a significant impact and have to be cared about sooner rather than later.
What do you think? Sound off at JaneTheActuary.com!