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Let’s Help Small Employers Offer 401(k)s But Not at the Expense of My Kids

Anyone who knows me even casually, knows I am a Proud Public Pension Geek (PPPG). I am passionate about Americans saving, steady as she goes, over our working lives. I have advocated for public employees being allowed to shift into the savings vehicles I use in the private sector (401(k), IRA and HSA for health care costs). Not only would that better insure their security and peace of mind, but it would (eventually) end the financial threat coming from massive unfunded pension liabilities.

This does not mean I think that Congress has saving for retirement for private sector employees all figured out, or that 401(k)s et. al. work for everyone—if nothing else many Americans find it really hard to save (see my article about how using Social Security might be leveraged there) or their employers do not offer any retirement plan.

It has been decades since Congress has addressed encouraging retirement savings in a comprehensive way. The Left is capitalizing on that by getting states to offer defined benefit plans for low-income private sector employees. Several states including California (of course) have already passed the legislation needed to offer what will essentially become state-managed pensions (and eventually a guaranteed return)  for everyone. That is a very bad idea worth killing by offering a better idea.

The President and Congress are thinking about ways to help smaller employers offer a retirement plan to their employees  (the draft legislation does not currently cover seasonal or part-time employees but that is a possible improvement).

Robert C. Pozen, the former president of Fidelity Investments and now a senior lecturer at MIT Sloan, laid it all out in a commentary “Make it Easier for Companies to Offer 401(k)s” in The Wall Street Journal (my emphasis is added in bold):

Just before Labor Day, President Trump issued an executive order directing federal agencies to consider two significant reforms for retirement plans. The first would make it easier for small employers to band together to offer employees access to a common plan. The second would update the mortality tables to reflect longer life-spans, which would slow down the rate of distributions from most retirement plans.

In October the Labor Department responded by proposing a limited expansion of 401(k) plans for multiple employers—limited because the agency doesn’t have the legal authority to make major changes. Nor is the Treasury legally empowered to make the needed broader changes on plan distributions. Fortunately, both reforms are included in a bill, the Retirement Enhancement and Savings Act, or RESA, which is moving steadily through Congress with broad bipartisan support.

Almost 60 million private-sector workers don’t have access to any retirement plan at work, according to the Social Security Bulletin. Approximately 75% of those workers are employed by firms with fewer than 100 employees, which do not want to take on the financial and administrative burdens of running a retirement plan. Yet under current rules, unrelated employers are generally not allowed to band together to save money on the plans they offer.

RESA would change that by expressly allowing unrelated employers to sponsor multiple-employer plans. It would also permit qualified financial firms, with fiduciary obligations, to offer a standard plan to groups of small employers.

So far, this sounds great. I think when people have savings, and learn not to touch the money, they have more confidence about everything, and they are more likely to feel that this American Experiment is working for them. Not to mention how it protects against becoming dependent on the much-pilfered public purse in old age. Updating mortality tables brings some reality to the conversation, too.

But how will Congress pays for this idea (how to make it revenue neutral)? This is where Mr. Pozen  has partially lost me (admittedly for selfish reasons):

To encourage small employers to adopt multiple-employer plans or other retirement plans, RESA would cover their startup expenses. The tax credit for these startup expenses is currently capped at a miserly $500 per year for the first three years. Under RESA, that maximum would increase to $5,000 per year for three years, depending on the number of employees eligible for the plan.

To offset the budget costs of expanded MEPs, RESA would tighten the tax rules for required minimum distributions. Under current law, when plan participants reach age 70½, they must begin to take annual distributions from their IRAs or other retirement plans at a rate appropriate to their remaining life expectancy as calculated by the Internal Revenue Service. These distributions are taxed as ordinary income to participants (except for Roth IRAs).

If plan participants die before their plan assets are fully distributed, they can pass them on to named beneficiaries. But beneficiaries can then stretch out the distributions according to their own remaining life expectancy—which, depending on their age, could be another 30 to 50 years. That loophole, which is hard to justify on policy grounds, markedly delays the flow of taxable income from retirement plans.

Slow down, Robert. Why is the current approach “hard to justify on policy grounds?” I think he would say, well, the deal is you got to reduce your taxable income during your working years when you made contributions to retirement plans; when that money is withdrawn, you are expected to pay income tax. Yes, that is the deal; and I will pay and pay and pay but I do not like the deal-change for my adult kids:

RESA would partially close the loophole by requiring most beneficiaries to distribute the remaining assets within five years of the plan participant’s death. The bill includes major exceptions for spouses, minor children and disabled beneficiaries, but it’s revenue neutral: the expansion of multiple-employer plans reduces federal tax revenues by $3 billion over the next decade, which is roughly equivalent to the revenue gained from partially closing the required-minimum distribution loophole.

Even though I’d be dead, I like that “loophole” for my children and may not want to give it up, at least as proposed, to pay for RESA. And I have a few policy reasons of my own, though they do not fit neatly into the tax code.

I love maxing out my 401(k); I want to provide for a secure retirement so the state never has to take care of me. I do not want to be a burden to my children and other family members. If I ever show up at the door of my brothers’ homes suitcase in hand, they’d say, “Kimmy, we love you but go away.”

And I love depriving the IRS of my tax dollars. Surely that money does more good in the marketplace.

But another big motivator is that I know way too much about how the Baby Boomers, and now the Millennials, have voted for a social welfare state on a “play now, pay later” plan.When the federal debt and unfunded state pension liabilities land, the growing entitlement state could get really ugly especially if we go all in on government controlled medical care.

I want my family to have a nest egg, a hedge to protect them against the bad decisions our country made and the flat-out tax robbery that will be rammed through to pay for it. If beneficiaries must pay taxes on a forced march of five short years, probably at their highest lifetime tax rate during earning years, it substantially reduces the value of that nest egg—and the flexibility to use it for their own retirement. Can I counter that the five-year distribution under RESA is much too short?

Still, I am delighted Congress is thinking about this.

I’d be a lot more delighted if Congress would get off the crack of spending more than it takes in (like I do) and make it easier for everyone to save (without punishing those of us who already do).

Mr. Pozen, the policy benefit of RESA is that more Americans will have savings, and in theory fewer people will strain the welfare state. We might even fend off bad ideas from the left like “pensions for everyone.” That could be good for financial service companies like Fidelity, and maybe good for taxpayers in the future. But why do my kids have to pay for it?

I guess that’s like asking Jessie James why he robs banks (cause that’s where the money is).

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