September 20, 2021

Congress Looks to Enact Mandatory Retirement Accounts

Congress is getting their new budget ready. As with every new budget, it provides a time to amend existing laws and enact new ones. Of the new enactments this year, Congress is proposing the implementation of a mandatory retirement account. This legislation would require employers to have retirement accounts set up for their employees and make automatic contributions from the employees’ paychecks. Employees have the option to opt-out, but without exercising that option, they will be automatically participating in saving for retirement.  

Why is Congress pushing? 

The United States has a looming retirement problem. According to a recent PWC report, American workers are behind on their savings. Many people – 25% - have no retirement savings, and even those who do, have often not saved enough. Workers in the 55-64 age range have an average savings of $120,000. With a standard retirement ahead of them, that comes out to only about $1,000/month. For many people, that will be a stretch to cover their basic expenses. 

The problem is compounded for younger workers. Many new positions do not offer a retirement account, as companies are smaller, leaner, and trend towards a start-up mentality. For those who are working solo as part of the gig economy, a retirement plan isn’t even on the table. Consequently, for workers in the 1-29 age range, a stunning 42% have no retirement savings at all. For a few of those that situation will be corrected as they advance in their careers, but for the large majority of them, it could prove to be a permanent situation. 

Compounding the problem is the growing Social Security crisis. The government itself has raised the specter of a Social Security program that can no longer meet its financial obligations. The main reason cited for the crisis is the fact that U.S. families are looking at a dropping birthrate. That causes less of a tax base and therefore less available funding for the program. Current projections peg 2037 as the year where things start to go south. With dwindling Social Security payments and insufficient retirement savings, Congress feels the need to take proactive measures. 

What kind of retirement plan is Congress proposing? 

Companies must offer a retirement account which is funded by automatic payroll deductions. The automatic contributions would start out at 6% and then trend upwards to 10%. The company is free to choose the retirement plan it offers as long as it meets predetermined criteria. The cost for the implementation of this plan would be offset by tax credits. Companies with 25 employees or less would be fully reimbursed for the first 5 years of the plan. 

As with any government program, exceptions exist. Exemptions from this mandate would include: 

  • Companies with less than 5 employees 
  • Companies that have existed less than 2 years 
  • Governments and religious organizations 
  • Employees under 21 years old 

Does automatic enrollment work? 

Congress is emboldened by relatively successful automatic enrollments that have been performed on the state level. The first of its kind was OregonSaves started in 2017. A recent Pew survey indicates that the Oregon program is so far doing well. Key points of the survey include: 

  • Employer cost – 80% of employers reported no out-of-pocket costs in implementing the retirement plan. Those who did report costs said they occurred mainly for external bookkeeping services and for employee setup and registration. 
  • Employer satisfaction – Of those who had no out-of-pockets costs, only about 20% expressed dissatisfaction. For those who did incur expenses, the dissatisfaction rate went up to 50%. 
  • Trends – Industries with high employee turnover were more likely to report out-of-pocket costs. 

Pros and cons of mandatory retirement plans 

It’s not hard to imagine that more Americans saving for retirement could only be a good thing. Brian Graff, CEO of the American Retirement Association, recently listed some of the expected benefits at the annual NAPA 401(k) Summit.  

  • Democratizing plan participation – Currently there is a racial imbalance in U.S. retirement saving. However, plans with auto enrollment show no disparities with 80% of all worker populations participating. 
  • Increased retirement saving – Preliminary studies project that automatic enrollment will produce 62 million new retirement savers. 
  • More plan sponsors – New plan sponsors are estimated to increase by 625,000. This is obviously good news for plan providers. 

However, not everybody shares the same positive perspective. The general consensus of those opposed is that this is simply a new mandate that puts an economic and administrative onus on smaller employers. In his response to the proposal, Rep. Kevin Brady said “Small business owners know this is yet another, or feels like another war on work and particularly on small businesses.” 

What’s next for the mandatory retirement proposal? 

As soon as the House finishes its mark-ups, the Budget Committee and Rules Committee will study it. Then it will be passed on to the entire House for a vote. Due to the current Democratic majority in the House, it is expected to pass. Once passed, it would be passed on to the Senate for consideration and voting. 

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