Introduction:
A recent CNN article describes several bills before Congress designed to change rules governing retirement plans including the Secure Act 2.0, a bill that has been passed by the House, and several proposals drawn up in the Senate. This memo outlines these legislative proposals and evaluates their potential financial impacts.
Features of the House Secure Act 2.0 bill:
- Requires automatic enrollment in 401(k) plans, sets an initial contribution rate at 3.0 percent of salary, and increases contribution rate by 1.0 percent per year of service,
- Increases catch-up contributions for people aged 62-64 and invest catch-up contributions in Roth accounts.
- Allows employer matching 401(k) contributions on student loan payments,
- Increases initiation age for required minimum distributions (RMDs) from retirement plans,
- Require employers cover part-time workers working at least 500 hours per year for two years,
Discussion of bills in the United States Senate:
The CNN article discusses several Senate bills addressing pension issues, which could be coupled with the bill that has already passed the House.
- A bill offered by Senator Cardin and Senator Portman differs from the Secure Act 2.0 bill by excluding the automatic enrollment provision and its tax treatment of catch-up contributions.
- A bill under construction by Senator Murray and Senator Burr may include provisions for new emergency savings options and annuity purchases by workers.
- The starter K-bill offered by Senator Carper and Senator Barrasso facilitates creation of low-cost retirement plans, for small businesses and startups. Proposed plans would have a $6,000 annual contribution limit and would allow automatic enrollment.
Analysis:
Comment One: The automatic enrollment provisions in Secure Act 2.0 could lead to suboptimal savings outcomes for some workers. It could lead to workers placing funds in a high-cost 401 (k) rather than a low-cost IRA. (High 401(k) fees can decimate retirement savings as discussed here.) Workers with substantial debt may be better off foregoing retirement contributions and rapidly repaying loans as discussed here. Many workers need to prioritize contributions to health savings accounts over additional contributions to 401(k) plans as discussed here. This article makes the case for investments in Series I bonds outside of a retirement account instead of conventional bonds inside a retirement account.
Automatic enrollment into suboptimal financial options is bad policy. The Cardin-Portman bill without an automatic enrollment provision would be preferable to the House bill. A compromise bill would limit automatic enrollment to the amount needed to maximize receipt of the employer match and automatically enroll workers at firms without an employer match into IRAs.
Comment Two: An empirical analysis of the finances of people choosing to currently make catch-up contributions could determine if an expansion of catch-up contributions helps people who need to catch up or people already ahead. It is likely expanded catch-up contributions for people in the 62-64 age group will primarily assist people who have little or no debt and are already well prepared for retirement. People with debt should retire debt rather than increase contributions to their 401(k) because one of the worse financial outcomes is to enter retirement with outstanding debt and all financial asset inside a 401(k) plan.
Comment Three: It seems unusual to require catch-up contributions near retirement be made in Roth rather than conventional accounts. I generally favor the use of Roth accounts instead of conventional account, but Roth contributions are most effective for young workers in low marginal tax brackets, not older workers nearing retirement.
Comment Four: The proposal to increase the age of mandatory RMDs will benefit wealthier households capable of living by consuming from assets outside their retirement plans. Less wealthy households will disburse their retirement assets earlier in life out of necessity. Households that delay distributions from their retirement plan because of the change in RMD rules will have to increase distributions and could pay higher tax later in life.
Comment Five: The Secure Act 2.0 provision allowing employer matching contributions for workers making student debt payments will have a limited impact on savings incentives for most student borrowers and is not the most effective way to assist student borrowers. Many young adults with student debt work at firms that either do not offer 401(k) firms or offer a plan without an employer match. Young student borrowers that switch jobs prior to the employer contribution vesting will lose the contribution. A rule allowing employer matching contributions into an IRA and allowing matching contributions for student debt payments would assist more student borrowers than the student-debt provision in Secure Act 2.0.
Comment Six: The goal of increasing retirement savings for part-time workers would be better achieved by automatic IRA contributions instead of expanded 401(K) eligibility and automatic 401(k) contributions. It would also be useful to change IRA rules to allow employer contributions into an IRA. The participation of part-time workers into 401(k) plans will increase 401(k) fees. Workers that use IRAs are free to select a low-cost highly diversified fund.
Comment Seven: The goal of increasing retirement saving for workers at small firms that do not have a 401(K) plan would be better achieved through automatic enrollment in IRAS than by the creation of streamlined 401(k) plans. Workers could seek out a low-cost IRA and are less likely to close the IRA than the 401(k) when they move to a new position. Also, the streamlined 401(K) option created by the Carper/Barrasso bill could displace more comprehensive 401(k) plans both among new and existing firms.
Comment Eight: Many people currently withdraw a substantial portion of their retirement funds prior to retirement. Around 60 percent of young adults have borrowed from their 401(k) plan. It is unclear how the Murray/Burr bill will facilitate savings for emergencies while increasing saving for retirement. One way to address this tradeoff is to encourage a shift in retirement savings from conventional accounts to Roth accounts. Roth accounts allow disbursements of contributions without penalty and tax prior to age 59 ½ while conventional accounts apply penalty and taxes to all early disbursements.
Current retirement plan rules allow the worker to disburse all funds at any age if she is willing to pay an additional tax and penalty. My view is any expansion of the use of retirement funds for emergencies without penalty or tax should be combined with a rule change that requires a portion of funds contributed to the retirement plan remain allocated for use after age 59 ½.
Comment Nine: An alternative to the Murray/Burr proposal for the purchase of annuities in a retirement plan is a program, like Oregon Saves, that allows workers to contribute to the state pension fund. The Oregon Saves program also obviates the need for creation of retirement plans by small businesses.
Concluding Remark: Proposals altering the retirement savings system currently in Congress favor the use of high-fee 401(k) plans over low-fee IRAs. The primary beneficiary of these changes is Wall Street, not households experiencing the most difficult saving for retirement.
The comments presented here support the view that rules allowing employer contributions into IRAs and automatic enrollment into IRAs instead of 401(k) plans are superior to the enlarged role of 401(K) plan offered by current Congressional proposals.
Authors Note: David Bernstein recently published a 2024 Health Care Reform Proposal, which differs substantially from the ACA modifications favored by the Biden Administration and the Medicare for All proposal favored by the progressives. The program outlined in this paper available on Kindle would bring the United States close to universal coverage and would substantially improve health and financial outcomes for people with low-cost health insurance policies.