Will 2015 be the year that all American workers gain access to a retirement savings plan provided by their employer? It could be.
While retirement policy in general did not rise to the top of Congress’s to-do list in 2014, employer-sponsored defined contribution retirement plans were able to maintain all of the existing tax provisions and infrastructure that have led to successful saving for millions of Americans. The Senate Finance Committee elevated the discussion with a national hearing on retirement savings policy in 2014. And Senator Orrin Hatch, now chair of the Senate Finance Committee, affirmed his belief in the preservation of retirement savings incentives.
In addition, as of September 2014, the DC system held $6.6 trillion in assets, nearly double from a decade ago, according to the Investment Company Institute. That said, there are still tens of millions of working Americans who have no access at all to a retirement savings plan on the job.
Providing an auto-IRA (individual retirement account) through payroll deduction could be one solution for workers without access to a 401(k). Past Congressional proposals have generally included requiring companies with 10 or more employees to offer a no-frills payroll deduction plan — with no employer match. But opposition to any “mandate” requiring employers to offer such plans has so far stymied their chances.
Hopefully, this new Congress will present fresh proposals to close the access gap — perhaps by offering such generous tax credits and strong safe harbor protection from litigation that would encourage many more employers to offer plans voluntarily. What is clear is that absent some form of payroll deduction, most workers are highly unlikely to start saving enough to make a positive difference in retirement readiness. The more automatic design elements that can be worked into a plan, the more likely workers are to succeed. The need is real, and this Congress should act on it.
White House proposes myRA (My Retirement Account)
The White House also proposed a similar vehicle early last year, and an initial pilot program for myRA savings accounts was launched in December 2014. The program allows workers who don’t have a 401(k) to use payroll deduction to save for retirement by purchasing Treasury bonds in a Roth IRA account. In December, the Treasury Department created the new savings bonds for the program.
Investors can open an account with $25 and make contributions as low as $5. The accounts are limited to $15,000, at which point the savings would shift to a private-sector Roth IRA. The White House notes myRA is considered a “starter” retirement savings account.
By itself, however, myRA is too modest a proposal to make much of a dent in the nation’s overall retirement readiness.
States aren’t waiting
While no nearly universal federal workplace savings program is yet available, many states are moving to address the access gap. In 2012, California approved a state-run retirement savings program using payroll deduction. The legislation created a board charged with conducting a market analysis that must be completed before the program is implemented. There are an estimated 6.3 million workers in the state without access to workplace savings.
Since then, more than a dozen states have considered or begun exploring the possibility of introducing a savings vehicle for workers without a 401(k).
Last month, Illinois adopted a state plan for private-sector workers who do not have access to workplace savings. Beginning in 2017, the Secure Choice Savings Program will require employers with 25 or more employees without a workplace retirement plan to automatically enroll workers in the state’s program, allowing them to invest in a Roth IRA. Workers can opt out.
Also joining the growing number of states exploring retirement savings, Connecticut recently launched a feasibility study to create a public retirement plan for private sector workers.
Still, creating retirement savings programs, with differing structures and mandates, can be challenging.
Outlook for 2015
With such a variety of proposals for extending workplace savings access, 2015 could be a year of real progress toward greater retirement readiness. Preferably, Congress will see the way the wind is blowing at the state level and act on broad, national legislation to extend workplace savings access. That would be far better than letting us grow a complex, multi-state patchwork of savings initiatives. The need is real and so is the opportunity to meet it this year.