Is an IRA in most workers’ future?
Readers, I am embarrassed to admit that a radical change to our retirement system, tucked into the “Build Back Better” Budget Reconciliation bill, wholly escaped my notice until just recently. As explained by Ashlea Ebeling, also at Forbes,
“Under the proposal, starting in 2023, employers with five or more employees would have to offer a retirement plan and automatically enroll employees, diverting 6% of their pay to a retirement account. An automatic escalation clause would increase the automatic contribution to 10% of pay by year five. The default plan would be a Roth IRA invested in a target-date fund, a mix of investments based on your expected retirement year.
“For employers, it’s a mandate. They would have to offer the plans. Employees would be able to opt out.”
In some respects, this would be similar to the autoenrollment plans now in operation or under implementation in Oregon, California, Illinois, and elsewhere. In Oregon, for example, employees are defaulted into participation in a state-managed IRA, starting at a contribution level of 5% and increasing to 10%, but with employees able to adjust their contribution or reject contributing entirely.
But there are crucial differences. In the first place, under the new federal mandate, employers would be obliged to select a specific IRA in which to enroll their employees, rather than merely forwarding payroll deductions to the state. It appears that they would choose from a list of approved providers. Second, the various state programs have had extended phase-ins; the federal mandate applies to all employers with 5 or more employees from day one, and there appears to be no analysis of how it would be for these small employers to do so. Third, the program requires employers must choose, not just any IRA, but only those in which there is an option to convert the account balance into an annuity at retirement.
It also continues to be the case that workers are being “nudged” into 10%-of-pay contributions without any useful guidance as to what the right saving level is for their personal circumstances; given the progressive level of Social Security benefits, which replace a far greater percentage of pay for lower-earners than middle- or upper-earners, there is no one-size-fits-all answer here, and, indeed, some lower-earners may be better off with no savings at all. There is also very little information on what happens when paycheck-to-paycheck workers are placed into these programs — do they opt-out? Reduce their spending? Or end up in debt? (To the best of my knowledge, only one study exists on this question, concluding that, on average, debt does not increase, in the case of an auto-enrollment program with a 3% contribution rate.)
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But what is most troubling is for this proposal to be tucked away into the Reconciliation bill, camouflaged as a tax because, you see, the fine that employers will pay, $10 per employee per day, for failing to comply with the requirements, is labelled a “tax,” so that the law fits within the requirements for a Reconciliation bill. In the same manner as I found it appalling to consider passing a major family leave bill using the Reconciliation process, without public discussion about the plan design and financing (or lack thereof), so, too, this is the sort of bill that simply has no business being passed in this manner, and taking people by surprise afterwards.
This is a deep, deep change for employers and employees. Whether IRA providers develop low-effort ways for employers to elect their offerings and suitable educational programs for participants, whether the planned Automatic IRA Advisory Group does its job well, and whether the government creates methods of compliance that burden employers as little as possible while achieving the program’s goals, are very much unknown. It would also be far better for such a program to be implemented alongside wider Social Security reform. To hide it in a massive spending program is yet another illustration of the deep failures of Congress as a governing body.
As always, you’re invited to comment at JaneTheActuary.com!
