Virtually every study of Americans and retirement preparedness has the same bleak warning: Millions of individuals are at risk for not having enough money to maintain their standard of living in retirement, and the problem is only getting worse.
There are a variety of reasons why things are so bad, of course. But one major factor is the declining number of employers that offer retirement pension plans.
That fact is prompting a number of states to consider mandated retirement savings programs. The nation’s first such program was passed this January in Illinois.
Known as Secure Choice, the Illinois program goes into effect on June 1, 2017, and it affects all employers with at least 25 employees and which have been in business for at least two years in that state. Companies that already offer a retirement savings plan of some type would be exempt.
Participation in the Illinois program by individuals is voluntary. Their employer must offer a plan, but the employee may opt out if desired. The hope is that most won’t, since research has shown that employees that are automatically enrolled in a retirement plan tend to stay with it.
Employers may also offer a retirement plan at any time prior to the June 1, 2017 start date and be entirely exempt from the whole bill.
The Illinois program was at least three years in the making, and was a hard-fought victory to help citizens better prepare for retirement, the legislation’s key sponsor, State Senator Daniel Biss told Retirement Wire. But once it passed, the measure quickly drew a lot of fans, and its core provisions have received a lot of interest by other states.
According to a recent article in USA Today, several states are exploring similar legislation to the Illinois program. Oregon, Connecticut and California are looking into Work and Save plans, which would enable workers to save for retirement through regular payroll deductions. But employers would not have to pay the costs of administering these plans.
Studies for retirement plans are also in the works in Oregon and Minnesota, according to the AARP, and the Commonwealth of Massachusetts has a plan in the works that would include non-profit employers only. Likewise, North Dakota, Utah and Indiana have bipartisan sponsors lined up for proposals.
Federal bills aim to make pension plans more palatable
The issue of pension plans is also receiving strong interest on the federal level, and two bills were recently filed in the Senate and the House of Representatives that would make it easier for employers to offer pension plans to their workers.
During the week of Jan. 25, the Collins-Nelson Retirement Security Act of 2015 was filed in the Senate by Senators Susan Colling (R-Maine) and Ben Nelson (D-Fla.); while a companion bill, the Retirement Security Act of 2015 was filed in the House by Reps. Vern Buchanan (R-Fla.) and Ron Kind (D-Wisc.). The bills were introduced in both branches of Congress to increase the odds of success.
The federal proposals aim to reduce the cost to employers of offering pension plans by enabling them to join multiple employer plans (MEPs), thereby sharing administrative costs. The federal bills would impact companies up to 500 employees in size. To aid smaller companies – those with fewer than 100 employees – the bills provide a new tax credit equal to the cost incurred for offering the pension plan.
Both Senators Collins and Nelson stressed the need for the new legislation to offset what is a dire retirement picture for too many Americans.
“I have heard countless stories of retirees whose savings did not go as far as they anticipated,” said Senator Collins in announcing the bill. “Nationally, one in four retired Americans has no source of income beyond Social Security. In Maine, the number is one in three. Four in ten rely on that vital program for 90-percent of their retirement income. Yet, Social Security provides an average benefit of just $1,294 per month – less than $16,000 per year. It’s hard to imagine stretching those dollars far enough to pay the bills and, certainly, a “comfortable retirement” is out of the question.”
In his announcement, Senator Nelson outlined the perceived benefits of the new plan:
- “Encourage small businesses to offer retirement plans. Cost is a significant reason why more small businesses do not offer retirement plans. The bill would lower costs by allowing small businesses to join multiple employer plans (MEPs) to share the administrative burden of a retirement plan. Second, under current law, one business’s failure to meet the minimum criteria necessary to maintain a tax-preferred retirement plan can endanger benefits for all MEP participants. The bill would direct the Treasury Department to issue regulations to address this issue. The bill reduces costs for all businesses by directing the Treasury Department to simplify, clarify, and consolidate notice requirements for retirement plans.”
- “Allow employees to save more. The existing safe harbor for so-called “automatic enrollment” plans effectively caps employee contributions at ten-percent of annual pay, with the employer contributing a “matching” amount on up to six percent. The bill would create an additional safe harbor for these plans that would allow employees to receive an employer match on contributions of up to ten-percent of their pay. Employees would be able to contribute more than ten-percent, albeit without an employer match. The bill helps the smallest businesses – those with less than 100 employees – offset the cost of this additional match by providing a new tax credit equal to the increased match.”
- “Ensure that low- and middle-income taxpayers can utilize existing incentives to save. The tax code currently provides a non-refundable credit of up to $1,000 for eligible individuals ($2,000 for joint filers), who contribute to IRAs or employer-sponsored retirement plans. This credit is only available to low- and middle-income individuals. Yet the credit cannot be claimed on a Form 1040EZ. This bill would direct Treasury to make the credit available on Form 1040 EZ.”
Not everyone supports government mandated programs
Still, despite the enthusiasm that Collins and Nelson share for the federal proposal, not all retirement planners feel that government should be pursing such retirement planning programs.
“Principally and financially I would be against it,” Rick Foster, president and founder of Guardian Financial Management in Louisville, Texas, said.
“Principally, it has never been the job of state or federal government to force us into saving. What this does is essentially make people operate or live their life as if they were in a union. Somebody could be completely frivolous and not have to worry or even think about being responsible with their money and the government will take care of it. So principally I think it is a very bad deal. It is just one more step in taking away some of our liberty.”
“Financially I think it is a bad idea,” Foster said “If you take a look at the Social Security system, if people had had their own money invested they would have been much better off. The TSP program with the post office employees is a good example that shows the lack of knowledge or experience to invest properly. The TSP program has average about a 1 ½ percent return. When you put the government in charge of something that is not really their job, they tend to not do a very good job of it.”
Still, there is a role for government in helping Americans better plan and save for retirement, Foster said.
“If states want to be involved in educating people in how to prepare, that would be a good thing,” Foster said. “For example, for people that waited too long and didn’t invest, what are some of the things that they can do? If the states want to educate people on how to put together a monthly budget, how to save, how to back off on some of your spending. If they want to do some things like that it would be helpful. But not anything that they do where they’re forcing people into doing something with the guise that this is here to help you.”