Republicans and Democrats have begun discussing a new round of retirement savings legislation centered on House Ways and Means Chairman Richard E. Neal’s proposal to require businesses with at least 10 employees to offer retirement plans and automatically funnel a portion of their workers’ pay into savings.
Backers, including insurers and other investment providers who will gain new customers, say the requirement will fill the biggest gap in America’s workplace retirement system: small businesses, who often don’t have the wherewithal to bear the costs and administrative burdens of setting up 401(k)-style plans. Such plans have tax benefits that outside savings plans do not, and also often come with the added bonus of an employer match.
Most workers who don’t have access to workplace plans work for smaller firms, analysts say. Absent individual savings, these workers could have to rely in part on Social Security’s average annual benefit of less than $18,000 to get through retirement.
Workers without a company-backed savings plan can make tax-deductible contributions of up to $6,000 this year to a traditional Individual Retirement Account — $7,000 for individuals ages 50 and older — or to a Roth IRA, to which an individual can make nondeductible contributions that are tax-free upon withdrawal.
But those tax benefits are limited based on income, whereas contributions to a workplace savings plan are tax-deferred — or tax-free withdrawals in the case of a Roth 401(k) — regardless of income. In addition, workers can contribute much higher amounts: up to $19,500 in 2020 to a 401(k)-type plan, plus an additional $6,500 catch-up contribution for those ages 50 and older.
The default option under Neal’s proposal would be a Roth, which costs the government less upfront since taxes are taken out first, but ultimately it costs more decades down the road because the built-up savings aren’t taxed again. With a tax-deferred account, the Treasury takes in less in the early years but gets its cut when workers retire.
The American Council of Life Insurers, a trade group, estimates Neal’s auto-enrollment plan would provide access to workplace plans for 30 million workers. Workers can opt out of participating, but ACLI estimates 22 million are likely to enroll, cutting in half the size of the workforce that currently doesn't have the opportunity to build up assets in an employer-sponsored plan.
Neal, a Massachusetts Democrat, told CQ Roll Call that he’s started talks with Ways and Means ranking member Kevin Brady of Texas on a “Retirement 2.0” package — the first installment was a suite of incentives that became law late last year, including tax credits for small firms that set up workplace plans. Neal said he expects the automatic enrollment measure to be the key feature, though other measures would be added. Neal said he spoke late last year with Senate Finance Chairman Charles E. Grassley of Iowa about a new bill as well.
Both Neal and Grassley said last year that they expected a second retirement package to emerge once the first had become law. Another bill authored by Senate Finance members Rob Portman, R-Ohio, and Benjamin L. Cardin, D-Md., which among other provisions would allow companies to make matching 401(k) contributions for employee student loan payments, could also be fodder for the new package.
“I would prefer that we tailor it around direct retirement savings, but to get things done sometimes you have to expand, not contract,” Neal said.
Neal’s auto-enrollment provision is “the known centerpiece” of “an active negotiation,” said Armstrong Robinson, vice president of legislative affairs at the Association for Advanced Life Underwriting.
“We think it is the perfect, powerful build on the foundation of” the smaller 2019 retirement savings law, said Susan Neely, ACLI’s president and chief executive. “We know the huge area of need is employees in small businesses who have not had access because it’s not as easy or affordable.”
According to the Bureau of Labor Statistics, 71 percent of the U.S. civilian workforce had access last year to a workplace retirement plan, with about four-fifths of those enrolling in those plans. Workers take advantage of the access when it’s there, but less than half of businesses with fewer than 50 employees offer plans.
Neal’s legislation, as in previous years, is expected to exempt companies with fewer than 10 workers, those that have existed for less than three years, governments or churches. State automatic enrollment provisions previously in effect would be exempt from the new federal rules.
The version Neal introduced in December 2017 would have set up automatic payroll deductions at 6 percent of earnings at first, with an automatic escalator adding 1 percent annually until a maximum of 10 percent is taken out. If employers don’t offer matching funds, then workers would be capped at $8,000 per year in contributions, with an extra $1,000 for older workers.
For employees that don’t pick their own investment vehicles, plans would be required to use default investments that meet Labor Department regulations on the appropriate mix of asset preservation and capital appreciation based on workers’ age and risk tolerance, like target-date funds that gradually get more conservative over time. Plans would have to offer the option of taking up to 50 percent of their distributions as an annuity, or an insurance contract providing a steady stream of payments for life.
Associations and companies who lobbied on the prior version also included the Insured Retirement Institute, State Street Corp., Prudential Financial, Massachusetts Mutual Life Insurance, Northwestern Mutual, Ameriprise Financial, Transamerica Corp., AARP and the Securities Industry and Financial Markets Association. Many of the same stakeholders lobbied for the 2019 retirement savings law, which among other provisions removed legal hurdles for employers seeking to offer annuity options in their workplace plans.
There will be opposition from some business groups that don’t like new federal mandates, particularly on small businesses. The U.S. Chamber of Commerce sees the legislation as having a “double mandate,” said Chantel Sheaks, the group’s executive director for retirement policy.
“It’s a mandate to sponsor a plan, and it’s a mandate to” structure the plan, she said. Sheaks said the measure wouldn't just hit small companies; it would also affect companies with hundreds or thousands of employees who don’t offer workplace plans.
She said it would not subject new plans set up after the bill is enacted to prescriptive investment requirements that older plans would need to meet, such as the option for up to 50 percent of employee holdings to be invested in annuities. It wasn’t clear how grandfathering provisions in the bill, designed to exempt plans that were established before the measure passes, would work, Sheaks said.
The idea behind Neal’s auto-enrollment bill is to prompt as little added cost as possible, said Mark Iwry, a Brookings Institution senior fellow and former deputy assistant secretary for retirement and health policy at the Treasury Department.
Iwry was one of the co-authors of the original proposal in 2006. The idea was spawned by the advent of direct deposit of paychecks into employees’ bank accounts, a technology that makes directing a portion of a workers’ pay into a retirement account simple, he said. “It’s OK with employers to direct deposit peoples’ paychecks,” Iwry said. “Now they’ll go ahead and direct deposit 5 percent into another account.”
Lawmakers also may have to find offsets — never a simple task — for the cost of including tax credits to help small businesses defray the costs of setting up new workplace savings plans, among other items that ultimately make it into “Retirement 2.0.”
Neal’s 2017 bill would have provided tax credits worth up to $5,500 annually for five years to qualifying small businesses. The earlier bill wasn’t officially scored by the Joint Committee on Taxation, and an updated tax credit structure is still being discussed, according to a Ways and Means aide who wasn’t authorized to speak for the record. But a similar 2016 proposal from President Barack Obama was estimated to cost nearly $4 billion over a decade.