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?
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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.