As the Obama Administration moves full steam ahead with healthcare reform, the Administration is also bent on helping more Americans with another pressing issue: saving for retirement.
In early September, the Administration released its list of retirement security initiatives--including expanding on two of Obama's existing proposals included in his budget, creating automatic IRAs and expanding the Savers Credit. The Administration's new retirement proposals would expand on automatic enrollment opportunities for 401(k) plans and other retirement vehicles; allow workers to put their tax refunds into U.S. savings bonds; and convert their unused vacation leave into retirement savings. The initiative also includes a plain-English guide issued by The Department of Treasury and the IRS to help workers with retirement plan rollovers when changing jobs.
While industry officials are pretty much in support of the Administration's retirement proposals, they believe that reaching an agreement on healthcare reform--which will likely come in October or November--will be a priority for the Administration before any of the retirement proposals are taken up on Capitol Hill.
As part of its plan, the Administration is focused on helping small and medium-sized firms to adopt auto enrollment, since it says nearly half of large sized firms have already done so. Since adoption, auto enrollment, the Administration says, has helped boost participation in 401(k) plans from 70% to 90%, and is particularly effective at getting low-income and minority workers to save. Jamie Kalamarides, VP of retirement solutions for Prudential Retirement, says that the Administration's four regulatory proposals "make it easier for small employers to adopt the best practices of the Pension Protection Act."
While simplifying procedures for auto enrollment would "be a good thing," adds Robyn Credico, national director, defined contribution consultant for global consulting firm Watson Wyatt, the initiative included in Obama's retirement proposals allowing small firms to automatically enroll employees in a SIMPLE-IRA, would be an "administrative nightmare" for small firms. The Administration says the SIMPLE-IRA combines the basic elements of a 410(k) and IRA, which "creates an easily administrable plan" for small firms. But Credico argues that many small companies "don't have automated payroll systems and it's not easy to automatically enroll people in a DC plan if you're a small company." Administering such a plan wouldn't only be costly for the small business, she adds, it would also be costly for participants because "on the other side most recordkeepers aren't very successful in managing small plans--they find it very hard to make money and that in itself will be a challenge." Plus, she says, it would be a "huge administrative challenge" for the IRS to automatically deposit tax credits.
To remedy the administrative and cost burden on small plans, Kalamarides says that Congress needs to reintroduce the multiple employer plan concept, which would allow small employers to increase their purchasing power through a consortium. "Small businesses do not have retirement plans because of cost and fiduciary reasons, and we think the multiple employer concept will increase purchasing power among small employers and reduce their administrative burden by having a simple plan design," he says. Also, there "could be a model plan written by the IRS."
Kalamarides goes on to say that "when each individual business is choosing its 401(k) design and investments [recordkeepers like Prudential] can't create economies of scale and package that along through pricing." However, when "several small businesses pool their resources together and have a common plan design and a common set of investments, that allows us to pass our economies of scale along in price."
Another interesting suggestion in Obama's proposals is allowing unused vacation time to be transferred into an employee's 401(k) account. This would apply to both employees who are terminating their employment as well as those employees that are still employed at a company. Kalamarides explains: "Under Revenue Rulings 2009-31 and 2009-32--which apply to both terminating and existing employees--compensation from unused vacation and leave time is eligible to be contributed to 401(k) plans up to the existing deferral limits." o