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A pension plan for everyone

By Barbara Whelehan · Bankrate.com
Friday, January 31, 2014
Posted: 5 pm ET

This week retirement planning was on the minds of our elected officials.

On the heels of President Barack Obama's announcement this week about the new myRA savings plan, Sen. Tom Harkin, D-Iowa, introduced a bill Thursday to establish privately run retirement plans that would look and feel more like traditional pension plans than the often-maligned 401(k) plans. Called the USA Retirement Funds Act, the bill would require employers with more than 10 employees to automatically enroll their workers in this plan if they don't already offer one.

Actually, Harkin came up with the idea for the USA Retirement Funds a couple of years ago, though back then it raised more questions than it answered. This latest version might be his "swan song" -- an earnest, last-ditch attempt to make a difference in the retirement security of Americans before Harkin leaves office.

Key provisions of the plan:

  • Workers would be automatically enrolled in a retirement fund at a deferral rate of 6 percent of pay, though they could elect to increase or decrease their contributions -- or opt out at any time. They could contribute a maximum of $10,000 a year on a pre-tax basis. Employers wouldn't be forced to match, but they could contribute up to $5,000 a year per employee for all employees.
  • The funds would be run by a board of trustees with a fiduciary duty to act in the best interests of participants, retirees and employers. They would be regulated by the Department of Labor.
  • The assets in each fund would be pooled and professionally managed in a conservative way by the trustees. At retirement, each participant would receive an income stream based on contributions that they made or that were made on their behalf, as well as the investment performance of the fund over time. The pooling would reduce risk and costs to workers.
  • A fund's performance, fees and investment policy would be provided annually to participants, along with an estimate of their benefits in retirement. These benefits would not run out during the participant's lifetime.
  • The number of these funds would depend on market demand. Participants could switch from one fund to another annually, and they could roll over IRA or 401(k) account balances into the fund if they wish.
  • Low-income individuals could use the refundable savers credit.
  • These plans would have survivor benefits and spousal protections.
  • Employers would not be responsible for fund performance, so they wouldn't have to add to the fund or make up shortfalls, as is the case with traditional pension plans. Also, if they already offer a retirement plan with auto-enrollment and lifetime income features, they wouldn't have to offer this plan to their employees.
  • In the event of a protracted economic downturn, benefits to retirees could be reduced up to 5 percent per year. On the other hand, if market returns were favorable, benefits could increase.

Diane Oakley, executive director of the National Institute on Retirement Security, says this would help increase retirement security for all workers. "We know that half of the workforce does not have a pension plan, and the data NIRS examined from the Federal Reserve Bank's Survey of Consumer Finances indicated that 45 percent of working households have no retirement accounts," she says. "So using automatic enrollment might go a long way to easing our huge gap when it comes to retirement savings."

I can't find anything wrong with this plan. It's not run by the government, and workers are not compelled to participate, though it would be good if they did. However, employers who already offer a plan without an auto-enrollment feature or lifetime income options would have to either change their plan or adopt this one. So there may be some resistance among plan sponsors and plan providers.

Even though it seems like a win-win-win proposal, passage of the bill likely will meet with resistance.

"It is always easier for Congress not to act on any bill," says Oakley. "More than eight out of 10 Americans want Washington to help make it easier to save," she adds.

If that's how you feel, write to your congressmen and women and demand they take some action.

What do you think of this proposal?

***

Follow me on Twitter: BWhelehan.

Barbara Whelehan is a co-author of "Future Millionaires' Guidebook," an e-book by Bankrate editors and reporters. It is available at Amazon, Barnes & Noble, iBookstore and other e-book retailers.

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4 Comments
lereveur
February 03, 2014 at 12:59 pm

I suspect thus is a plan to replace the waning demand for treasuries and mortgage backed securities thus transferring the risks of default to the public. The risks of default increase when credibility ebbs. I believe it's where we are now. Lets take a quick audit and see how many politicians, past and present, own these financial instruments.

Barbara Whelehan
February 02, 2014 at 3:33 pm

Hello Suman and Don,

Let me answer Don's question first. I linked to Sen. Harkin's press release, which provides more information about the bill, including an FAQ. Question No. 19 asks: Would USA Retirement Funds affect Social Security? The answer provided is as follows: "No. USA Retirement Funds would not affect Social Security benefits and are not a new government program. They are 21st-century retirement plans that would be run entirely by the private sector, just like defined pension plans and 401(k) plans."

Suman -- The bill summary says the following about trustees: "Each USA Retirement Fund would be managed and administered by a board of qualified trustees able to represent the interests of employees, retirees and employers. The trustees would be fiduciaries required to act prudently and in the best interests of plan participants and beneficiaries. They would also have to avoid conflicts of interest, remain independent of service providers to the fund, be bonded and have fiduciary liability insurance."

As for your second question, it would be great if everyone used existing tools. Has there been a public awareness campaign? I don't know of a government-run campaign, but the retirement industry spends a lot of money trying to raise awareness. For those who are interested in saving and investing for the future, plenty of information exists to help them get going.

Theoretically this bill wouldn't affect anyone who is already saving, but when bills go through Congress and committee, changes can be made, and the outcome cannot be predicted with 100 percent certainty. Right now, in this iteration of the bill, it wouldn't affect anyone whose retirement plan meets the requirements that I mentioned in my blog post -- i.e., the plan must feature automatic enrollment and lifetime income options.

Thanks for writing.

Don
February 01, 2014 at 12:23 pm

Do you think once a majority of the citizen get on board with the new proposed savings plan, along with the existing plans. Will the government network with financial institutions to follow gross funds that will allow a modification of social security so it would soon disappear or shrink payments?

Suman M Subramanian
February 01, 2014 at 11:51 am

Three categories of questions:

1. Who exactly are the trustees who would run this program? Politicians or financial professionals? How (and by whom) would they be compensated to guard against conflicts of interest in their recommendations?

2. Has an honest analysis been done of the startup and ongoing costs to the taxpayer of this program compared to something as simple as, say, a public awareness campaign to educate people about the benefits and availability of existing tools? For example, letting people know that IRAs can be opened at credit unions for as little as $25. I suspect the bulk of the non-saving public is simply not aware of the tools available to them.

3. If it still makes sense to proceed with this plan to get more people to save, can it be done without affecting those who are already saving? I'm concerned about the precedent set when people who were happy with their old health plans were forced to get new ones when their old ones were cancelled, and I do not want to see the same thing happen to retirement plans.

Thank you in advance for your consideration of and response to these questions.

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