Let’s Save Retirement … By Killing the 401(k)
Its authors may not have led with that title, but a recent paper
calls for wholesale changes to the way Americans currently save for retirement, including suspending all defined contribution savings arrangements because “they are complex, costly, and challenging for employers and employees to manage.”
The authors, who currently serve as fiduciaries to the University of Rochester’s retirement assets, want to replace the current retirement system with a one-size-fits-all mandate. Their plan would require employers of all sizes to institute a payroll deduction program to be invested in a so-called Trusteed Retirement Fund (TRF) (employers that currently sponsor DB plans could be excluded from participation in the program). The authors envision that these TRFs would be sanctioned by a new division within the Department of Labor.
The plan would also require an auto-escalation of the payroll deduction every time a participant is given a pay raise.
One is inclined to give the authors credit for coming up with a new alternative, but the reality is that their proposal is a cobbled-together mish-mash of ideas that have been tried before — in some already cases adopted, and in others discarded. In fact, the most misleading aspect of the report might be the notion that it represents new thinking.
There are many problems with this proposal. First, while it acknowledges the limitations of traditional defined benefit plans in terms of providing sufficient benefits for anything other than long-term workers, and highlights a series of current funding issues with those programs, it gives employers that offer these programs a “pass” on being subject to the TRF structure mandate.
Secondly, while their analysis shouldn’t be subject to the 10-year window budgeting myopia of Congress, the authors perpetuate the myth that retirement plan tax preferences cost the government money, with no acknowledgement that the structure merely defers the date at which those taxes will be paid.
The paper’s authors have a real affinity for the Australian system and its superannuation structure, noting that the government doesn’t provide tax preferences to accomplish the growth in that system. What they don’t mention is that that the core of that system is mandatory and completely employer-funded.
They acknowledge that workers don’t seem to be naturally inclined to buy annuities — so, in addition to some “new” product designs (like variable annuities), they propose to encourage workers to pick annuities at retirement by (drumroll, please) putting the retirement income number on statements so that people begin to think about their balance as a monthly income number.
As noted above, they are enamored of taking away the existing tax preferences that encourage workers to save (most of them, anyway; credits to those making less than $30,000 a year remain). By way of dismissing the potential impact, they rely on a study published (and still making the academic rounds) a couple of years ago about Danish workers. Now, aside from the fact that it’s far from clear that one can credibly find precedence for American worker behavior in the response(s) of a highly unionized workforce emerging from a mandatory savings structure, this new citation acknowledges that “Among those who were affected (by the removal of tax preferences), retirement contributions fell sharply.” That happens to be the higher compensated workers — who didn’t save less, but did save elsewhere.
So even in Denmark, those affected by the change in tax preferences took their money elsewhere. What might happen here if the higher-compensated workers — business owners, CFOs, HR directors — decided that they’d be better off saving elsewhere, and decided to cease offering plans, opting to simply payroll-deduct workers into these TRFs? What if they no longer had to incentivize participation by the workforce at large, or to pass nondiscrimination tests, by making matching contributions?
That’s not a problem for this proposal, which blithely assumes: “If an employer has been contributing directly to an employee’s DC plan, the employer would continue to make those contributions, but to a TRF instead of an existing DC plan…”
But wait — there’s more: “…and the (employer) contributions would be considered additional wages for the employee.” So even if the employer decides to continue making contributions, this proposal wants workers to pay taxes on them — now.
Perhaps the most egregious aspect of this proposal to “save retirement” is that not only does it eliminate any incentive for employers to contribute money for their employees’ retirement, but it actually seems to penalize workers for those contributions. This would have a terrible impact on the vast majority of the 60 million or more working Americans currently participating in employer-sponsored defined contribution plans. In fact, according to the 2013 PLANSPONSOR Defined Contribution Survey, less than 10% of DC plan sponsors do not offer any employer contributions to their employees. So this proposal puts employer money at risk for nearly 55 million American savers. In addition, it would probably change the saving behavior of participants in the current system if moderate income savers lose the tax deduction for retirement savings.
In short, this proposal is so damaging that you almost wish that the authors — who arguably ought to know better — were joking.Andrew Remo is ASPPA’s Congressional Affairs Manager.