Senate Finance Committee holds a hearing today on “Retirement Savings 2.0.” Here is what they should address to help small business retirement plans.
Ron Wyden, Chairman of the US Senate Finance Committee, issued this statement on September 2nd, commemorating the 40th anniversary of ERISA:
“In today’s economy, workers are carrying more and more of the load in preparation for retirement. It’s time to update our pension rules to help provide greater economic security in retirement – not less. As the Finance Committee continues to work on comprehensive tax reform this fall, we will take a close look at pension and retirement rules in the tax code to make improvements wherever they’re needed. Later this month, the committee will hold hearings on retirement security that examine additional steps to help American workers save.”
That hearing is today. Expert testimony will be from academics, the mutual fund industry (including Vanguard’s John Bogle) and journalists. Check the Finance Committee site for updates and testimony from the hearing. I’m not optimistic that we’ll see anything substantive this close to the midterm elections, but I am curious to see what trial balloons get floated. These hearings help shape the debate and frame the issues for future legislation.
Senator Wyden wants to “help American workers save.” I agree. And there are several ways Congress can help small business employers – and working investors. Here is my take on the top three objectives the Committee should examine:
Increase participation in retirement plans by younger employees and lower wage earners. We need to get more people saving – and from an earlier age. The sooner workers begin saving for retirement, the far greater will be their nest egg at retirement. We have two issues to be addressed: Getting workers to participate, and then getting deferral rates up to appropriate levels.
The employer match is the most effective way to incent participation. But many small businesses do not offer a match – especially those with an itinerant, youthful, low wage work force. Congress should consider greater tax incentives for employers to offer a match to employees. Those incentives can be tailored toward matching low wage earners. With appropriate incentives, employers may actively work to attract employees to the company plan – eliminating what is now an often adversarial position on plan participation.
Congress also should address incenting workers to save at a higher rate. For many low wage earners, Federal income taxes are minimal – tax savings are not a consideration. Tax law should be tweaked to provide low wage earners with relief from withholding taxes to incent savings rates. These incentives can be phased out as income levels increase.
Reduce “leakage” from retirement plan accounts. Low wage workers and the young tend to change jobs more frequently. When they do, they often cash out their 401k balances with the previous employer – and get absolutely hammered with taxes and penalties. This issue can be mitigated through legislation.
Congress should consider making withdrawals from retirement plans more difficult. Because punitive tax penalties are ineffective in curbing small (under $5K) cash outs, mandatory holding periods should be considered. Congress also should consider reducing the ability to take loans and hardship withdrawals.
If Congress goes so far as to provide greater incentives, 401k participation should become a serious commitment by the employee. 401k participation should be viewed as a very valuable and very serious proposition. Today, plan participation commitments are quite casual. This approach needs to change. If we make plan participation a serious commitment for all sides – greater benefit but with longer term commitment, people will take more time to consider the consequences of their actions.
Establish investment “safe harbors” for small business retirement plans. As I have written previously, new technology has created the opportunity to “level the playing field” for small businesses looking to provide low-cost alternatives. Every small employer has access to low-cost index investments and target date funds. Regulators should consider giving fiduciary “safe harbor” to those employers who choose appropriate index investments that meet regulatory standards.
Congress should consider legislation directing the DOL to establish index investment standards related to underlying index, acceptable tracking error and transparent pricing. Small plans that create diversified choices from investments that meet the standards shall be deemed to meet fiduciary standards.
And we need target date fund standards. With the huge flows into these investments, disclosures regarding fees and asset allocation changes over time need to be clarified. Investments that meet the clarity standard would be approved for the employer safe harbor provisions.
I’ll be back next week with analysis of the hearing.
About Greg Carpenter
Greg Carpenter founded Employee Fiduciary in 2004. With 29 years of experience in accounting and finance, Greg has brought his expertise to a variety of advisory, senior and executive management roles. Greg has worked for a national accounting firm, a Fortune 500 plan sponsor, a major brokerage firm, and he served as the CEO of a major 401k TPA firm. He is a CPA and earned his BA from Yale and his MBA from The University of Chicago Booth School of Business.