How to get employees of small businesses to save for retirement
CHICAGO (Reuters) - The U.S. Chamber of Commerce and AARP usually can be found on opposite ends of the ideological spectrum when it comes to retirement policy. The two Washington advocacy powerhouses have often been at loggerheads on key policy fights, such as Social Security and Medicare reform.
But these strange bedfellows teamed up last week to sponsor a half-day seminar on a major challenge: improving access to workplace retirement plans and boosting participation and saving rates.
The two groups are not teaming up to sing "Kumbaya" just yet, but several panels of plan sponsors, financial services and human resources executives and policy experts did identify a range of reasonable, ideologically moderate ideas for tweaking and improving the current system.
And the system could stand some improvement. Just 72 percent of working Americans say their employer offers them a retirement plan, according to the Employee Benefit Research Institute's 2013 Retirement Confidence Survey.
The key to boosting that figure is getting more small businesses involved. Just 14 percent of businesses with fewer than 100 workers sponsor any type of retirement savings plan, according to a recent U.S. Government Accountability Office study.
A top financial services executive kicked things off by pushing an idea the Chamber never likes: an employer mandate.
Robert Reynolds, chief executive officer of Putnam Investments, wants to require every business to offer a retirement savings option to workers. His preferred approach is the automatic individual retirement account. This reasonable, if modest policy idea with bi-partisan parentage - and supported by the Obama administration - has been bouncing around Washington since 2006.
Here is the idea: Companies that do not want to sponsor a retirement plan would have to offer their employees a payroll-deduction saving option that would work like the payroll tax deduction. Employees would be enrolled automatically when they are hired, unless they chose to opt out. They would pick an investment company option through a federally managed online marketplace; the mandate would be limited to companies with more than 10 workers.
"They're all taking out... (payroll) taxes, so why couldn't they also allow for individual savings?" Reynolds told Reuters. "You could give a tax credit to cover the administrative costs of handling the deductions."
One author of the automatic IRA concept is David John, senior strategic policy advisor at AARP's Public Policy Institute.
He thinks it would make a big difference in expanding retirement savings options, especially if product choices and fees are easy to understand and transparent. "We need to make this as simple as possible - sort of a 401(k) plan on training wheels," he said in an interview.
That would mean limiting investment choices to just three options - a target date fund, a government bond fund and a third, more-aggressive equities fund. Providers would be free to set fees as they like, but the online marketplace would include a simple measure of comparative costs.
Reynolds also thinks it is time to require every retirement plan to adopt auto-enrollment and auto-escalation features.
Auto-enrollment features have taken off in recent years, boosting plan participation sharply. But most of these plans have a low, 3 percent default savings rate, and too few have auto-escalation features, which bump up worker contribution rates annually.
Putnam research shows that employees automatically enrolled in workplace plans are on track to replace 91 percent of their pre-retirement income in retirement, and workers in auto-escalation plans are headed to 95 percent replacement rates. Those figures compare with just 73 percent for all workers who have access to a plan.
Here are a few other good ideas that surfaced last week:
- Encourage higher contribution rates. The Chamber and others are seeking elimination of an effective ceiling on employer matching contributions contained in the Pension Protection Act of 2006. The upshot: Relaxing the rules might encourage higher levels of matching - and entice workers to contribute more, too.
- Expand the saver's credit. The federal government offers a tax credit that can be worth up to half of what you contribute to a traditional IRA, Roth IRA or workplace retirement plan if your 2012 household income is $57,500 or less. But few qualifying taxpayers use the saver's credit, partly because it is useful only for households that actually owe taxes.
John advocates making the credit refundable - that is, available no matter what your tax liability. He also would like to see it deposited directly into a saver's account.
- Expand multi-employer plans. More small businesses might offer retirement benefits in greater numbers if they could combine them into multi-employer plans, which can reduce costs and administrative burdens. Multi-employer plans already exist, but are not used widely due to regulatory restrictions.
Even these modest proposals have not created common ground for AARP and the Chamber to press action together - yet. "What we agree on now," John says, "is the need to improve retirement savings."
For more from Mark Miller, see link.reuters.com/qyk97s
(The writer is a Reuters columnist. The opinions expressed are his own.)
(Editing by Linda Stern and Lisa Von Ahn)