Letter from the US: Retirement concerns
“Our priority is to be sure that Americans save enough for retirement,” explains CEO and executive director of the American Society of Pension Professionals & Actuaries (ASPPA), Brian Graff. The problem is that Americans are not saving enough, because of the way pension plans are offered and structured, and because of the economic situation.
At this March’s ASPPA 401(k) Summit, there was a panel discussion addressing whether the plans are a failed experiment. “A minority think so,” Graff says. “We don’t agree, but these plans can indeed be improved. The biggest issue is extending coverage. Many studies show that when people have a plan at work they use it: 70% contribute to the pension plan offered by the employer. On the contrary, if they are left alone, only 5% save for retirement.”
Graff continues: “We are in favour of a law that requires all employers to offer a pension plan, the same way that Obamacare has introduced universal healthcare coverage. Our proposal does not cost extra money to employers, as all they have to do is to offer a payroll deduction IRA (individual retirement account).”
According to the Internal Revenue Service, the payroll deduction IRA is the simplest retirement arrangement that a business can have. The employer has no filing requirements; only employees make the contributions and any business can provide this, establishing an IRA with a financial institution. The employee then authorises a payroll deduction for the IRA, and the employer’s responsibility is to transfer this.
The idea is in the President’s budget proposal, which gives tax credits to employers to cover the administrative costs. It has also been proposed by several states such as California, Connecticut, Maryland and Illinois. “In particular, the so-called ‘California model’ asks all businesses with at least five employees to auto enroll them in a payroll deduction IRA with a contribution of 3% of pay,” Graff explains. “It also includes a state option, which is a sort of group annuity programme. The employer would send the payroll deduction to the state that would outsource the managing to financial institutions.”
Talking about California, the city of Stockton’s bankruptcy is worrying the pension industry.
A federal judge has allowed Stockton to restructure its finances under chapter 11 bankruptcy protection, but signalled it might have to cut payments to its pension fund. “What’s concerning is the significant level of underfunding among many public pension funds, which is encouraging states to migrate their employees from DB to DC plans,” Graff observes. “DB plans are not bad per se. It’s the failure to fund them that creates serious issues.”
Another issue is the economic crisis. To cope with financial emergencies many American workers have taken hardship withdrawals from retirement savings or have taken a loan from their 401(k) plans, without being able to repay it when employment was terminated. If a loan from a pension plan is not repaid when the worker leaves the company that offers the plan, it’s treated and taxed like a benefit distribution. So the power of their compounding retirement savings has been weakened. “We believe it is important to minimise the harm that comes from accessing retirement funds for non-retirement purposes,” Graff stresses. “The ideal solution would be to allow for a rollover of the loans.
But most 401(k) plans providers are not in favour of that because they would have to chase after workers to make them pay back the loans. That’s why the Shrinking Emergency Account Losses in 401(k) Savings Act of 2013 (SEAL Act), filed in March in the Senate, simply gives more time to workers to repay their loans but doesn’t allow to roll them over. It’s a sensible improvement and an important step”.
Another issue is contributions to 401(k)s. According to the law, the initial default contribution rate in auto-enroll plans is 3%. “Most of the pension fund industry professionals think it’s too low to generate meaningful retirement savings and wish the minimum be raised to 6% that, together with the employer’s match, could arrive to 10%, a satisfactory level,” Graff concludes.