Vantage Retirement Blog

When now President Obama was campaigning last fall, the picture for the 401(k) was even worse, with hints of “free” withdrawals, nationalized retirement programs, and other ideas to kill the 401(k). Now he just wants to “tweak” retirement savings with the intent of encouraging worker savings over spending, and … wait for it … thereby reducing the trade deficit … really?!?

Interestingly, the proposed changes are largely “administrative” (read “a mess for employer-sponsors and the industry") and don’t require Congressional approval. Does he just want to move quickly, or is he concerned that Congressional hearings on the matter would shed too much light on the unintended consequences of his changes? Just wondering …

Let’s take a look at what President Obama proposed Labor Day weekend and talk about what the impact of these changes mean to employee retirement savings, employer plan sponsors, and the retirement industry.

• Auto-Enrollment – Simplify the rules, making it easier for workers to automatically enroll in an employee-sponsored 401(k) and other retirement plans. That means instead of making 401(k) plans a benefit that a worker must opt into, employers can enroll employees into accounts at the date of hiring unless the worker opts out. So will he mandate auto-enrollment in 401k plans as we know it today? Probably. But the kicker is in requiring ALL employers (including all small business owners) to provide a 401(k)-type vehicle for their employees. As they say, “the devil is in the details” … more on this below.

o Impact on Employee Retirement Savings – it will increase, no doubt, but it means a “take-home pay cut” for workers that they may not be able to afford.

o Impact on Employer Plan Sponsors – many questions arise. Making payroll work, effectively communicating opt-out procedures and investment information to prevent angry employees, etc. If the employer does not currently have a plan, then there are a bucket load of additional issues, costs, and administrative concerns.

o Impact on Retirement Industry – plan providers will be thrilled, IRA providers will be happy, opportunistic financial advisors and brokers (read “not qualified plan experts”) will scramble for new IRAs and plans, providers who can’t handle auto-enrollment now will be scrambling to make it work.

On the surface, not a bad proposal, I guess … except for that whole small business thing … keep reading. The Employer Plan Sponsors are the biggest “losers” on this one.

• Tax Refunds to Retirement – The Internal Revenue Service will change tax forms to allow refunds to be automatically deposited into retirement accounts. Sounds great, right?

One “version” of this I read said these refunds would be used to purchase U.S. Savings Bonds. Hmmm, more money for the government to spend. Currently available Series EE bonds don’t reach face value for 20 years. If I’m 60 years old and convert my refund to a savings bond, will I live to see it reach face value? Will there be penalties for early withdrawal? Will the Government issue a special series of savings bonds for this purpose? My brain hurts from the complications of this idea.

Let’s not think about that, but just consider refunds going into a retirement account. Will it be a government-run IRA? Will we be able to direct the refund into our company-sponsored 401(k) or personally-owned IRA?

o Impact on Employee Retirement Savings – probably negligible. How many will actually elect the retirement option on their tax return versus getting the cash? What is the tax impact upon withdrawal at retirement?

o Impact on Employer Plan Sponsors – uncertain. If the refund can go into the employer’s plan, how will the sponsor get the refund into the plan’s trust (and how long will they have to wait for it?) How will these “extra” contributions impact contribution limits and non-discrimination testing? Will they be exempt from limits and testing?

o Impact on Retirement Industry – uncertain. If the refund can go into the employer’s plan, how will they be accounted for? They will certainly require a new “bucket” contribution type to keep them segregated (read: system programming changes). How will they be treated upon withdrawal? Do the same withdrawal and taxation rules apply? If the refund can go into a personally-owned IRA, do the IRA providers need to account for these funds separately? How do these contributions affect annual IRA contribution limits? How are they treated on withdrawal?

Again, on the surface this seems like a great idea, but will all of the hassle encountered by plan sponsors and providers be worth the likely small utilization?

• PTO Credits to Retirement – to permit unused sick and vacation leave to be transferred directly into savings plan. Sounds fair … and better than losing it, right?

o Impact on Employee Retirement Savings – again probably negligible. How many employees are out there who don’t make every effort to use all of their vacation time? Workaholics, I suppose. I know employees, and if this goes into effect, they’ll make sure they use the time.

o Impact on Employer Plan Sponsors – Ugh! These means cash out of pocket for employers – especially those with “use it or lose it” policies in place. Unused time must be converted to dollars and deposited in the trust. Then there’s the accounting of it. Wage expense becomes retirement contribution expense. Is this an employEE contribution or an employER contribution? How do these contributions impact contribution limits, matching contribution calculations, and non-discrimination testing? What are the new administrative procedures for moving accrued time off the books and crediting retirement contributions? Are these W-2 wages if they are retirement contributions?

o Impact on Retirement Industry – This will require new contribution “buckets” on recordkeeping systems, and changes in programming for non-discrimination testing, participant statements, annual reporting, etc.

Again, on the surface this seems like a great idea, but will all of the hassle encountered by plan sponsors and providers be worth the likely small utilization?

Let’s get back to the Auto-Enrollment proposal and small businesses for a minute.

Again, the kicker is in requiring ALL employers (including all small business owners) to provide a 401(k)-type vehicle for their employees. What if a small business does not currently offer a retirement program for their employees? Will they have to establish a SIMPLE plan? So it would seem, since under the new initiative, the Treasury Department and the Internal Revenue Service will publish new guidance for small businesses on how to use automatic enrollment for the simplified plans. It will also encourage employers to institute an automatic “step up,” which increases a person’s saving rate each year or with each raise.

This harkens back to his original retirement proposals from January 2009, where he proposed that employers who do not currently offer a retirement plan will be required to enroll their employees in a direct-deposit IRA account. Workers may opt-out if they choose. The White House says this program will increase the savings participation rate for low and middle-income workers from 15 percent to approximately 80 percent … this may be true, but at what expense to employers and the industry. The White House also proposed that families that earn less than $75,000 would get a 50 percent match on the first $1,000 automatically deposited into their account. That’s a big cash hit to small employers! Remember reality here … if it costs more to have employees, employers will just have less of them!

I think the Obama Administration’s retirement proposals will have little impact on the savings rate and even less impact on the trade deficit because America is still a consuming society. They are best summed up by a quote from President Obama’s Labor Day weekend speech: "If you work hard and meet your responsibilities, this country is going to honor our collective responsibility to you: to ensure that you can save and secure your retirement." (emphasis added.) I believe firmly in providing the tools employees need to save adequately for retirement. I’m just not sure that removing all personal responsibility from the effort is … well … our collective responsibility.

Let me know if I can help … it’s what I do!