Saturday, August 14, 2010

'Mandatory' Sentences

We have long lamented the reality that only about half of this nation’s workers have access to some kind of workplace-based retirement vehicle, and with good reason.

Well, we now have bills introduced in the Congress, both House and Senate, that will, eventually, require that every American business that hires 10 or more workers offer them the ability to save for retirement (see Auto-IRA Bill Introduced With Employer Mandates, Auto IRA Bill Introduced in the House).

Now, my first reaction was “it’s about time.” After all, we can talk about inadequate savings rates, inefficient asset-allocation decisions, and egregious revenue-sharing arrangements—but workers with access to the opportunity to save are surely better-served than those without. And any number of studies have shown that those without access to those programs save less—when they save at all—than those who have the opportunity to participate.

But honestly, the more I read through the bill1 summary (and that’s MUCH easier than the legislative language), the more I was struck by the potential complications. Workers, of course, can opt out—but under the legislation, employers are stuck with having to set the programs up.

Not that those workers will necessarily be saving much, nor is it likely to be “enough.” The default deferral rate will be 3%, with no escalation (though the worker can bump up the rate), nor is an employer match permitted. Workers have the choice of saving on a pre- or post-tax (Roth) basis, though the default is post-tax.

A default investment structure is outlined—basically, a principal preservation fund for balances under $5,000, with a lifecycle fund for larger balances—but the employer will still have to choose a provider, and could still wind up with fiduciary liability for that choice, unless the employer picks a provider on the approved list (from an online database that the government will establish). The bill summary suggests that an employer will fill in some basic information about its workforce, be provided with a list of suitable providers, click on one, and be connected2.

Moreover, there are eligibility standards to be monitored (those employed for at least three months and who have attained age 18 as of the beginning of the year), payroll deposit deadlines to be met (and an excise tax if they are not), a requirement to provide employees with some kind of standardized form explaining the program and investment decisions (though this could be part of the W-4), and a $100 excise tax per employee who is not properly covered by the program.

Oh—and to offset the costs of implementing and running this program, the employer will get a tax credit of…$250.

Will it Matter?

So, will this legislation live up to its promise? Will it provide 42 million more Americans with an “easy, effective way to take responsibility for their fiscal futures and plan for a secure retirement”? The truth is, I’m not sure.

We can only hope that regulators are as attentive to the fees assessed on these accounts, and on the investment structures created—accounts that are sure to be miniscule on an individual basis, but which will almost certainly in their entirety be an enormous pile of temptation.3 As for its impact on participant savings—well, it is perhaps a step in the right direction, certainly in terms of getting those who have jobs to begin putting some of that income aside for retirement. Surely the additional incremental cost and burden to the employer won’t by itself be enough to dissuade a hiring decision—though in tandem with other mandates and the promise of higher taxes, to boot, it might well.

There is, of course, always the possibility that a realization that a retirement plan mandate is coming will spur those who have been holding off on setting up a 401(k) to do so now—though, IMHO, it’s every bit as likely, and perhaps more likely, that they will simply set aside those plans and wait for the “government’s” version (which, even with all its requirements and costs, is surely less onerous).

To their credit, those pushing the bills are trying to plug a retirement savings hole that has too long been ignored. There is every indication that they have been thoughtful in their analysis, and have sought to minimize both the cost and the effort imposed on businesses.

That said, there is a cost—in time, effort, and focus—attendant with setting these programs in place (and it feels like more than $250 worth to me). While, in better times, this might be a laudable initiative4, it strikes me as oddly inappropriate at a time when concerns about additional government mandates appear to be restraining hiring and business growth.

Timing, it is said, is everything. Unfortunately, I think this mandatory IRA bill may well be a good idea at a bad time—and that, IMHO, could make it a bad idea.

—Nevin E. Adams, JD

(1) For simplicity, this column focuses on the bill introduced in the Senate, which was the first to be introduced, though the two appear similar, if not identical.

(2) From the Bingaman bill summary: “The website will be designed to assist employers in choosing a provider. The employer will enter a small amount of information about itself and its employees in a starting screen. Then, employers will be directed to a page listing providers willing to serve as trustee for employees’ Automatic IRA accounts. Once the employer makes a choice, it will be directly connected to the provider.”

(3) The Bingaman bill summary explains the phased implementation approach not as an accommodation to employers, but so that retirement service providers can “prepare for a significant expansion in the number of IRA accounts (through product innovation and marketing) and regulators to address enforcement and other regulatory issues.”

(4) The bill wouldn’t kick in for everyone right away: In the first year after enactment, the provision will apply only to firms with 100 or more employees (counting employees who earned more than $5,000 in the prior year); in the second year, 50 or more; in the third, 25 or more; and in the fourth, 10 or more. So, perhaps by the time it is effective, the “timing” will be better. However, employers may well focus on the future implications when they make current hiring decisions.

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