It’s going to be a busy year in Washington and state capitals for policymakers working to improve the retirement security of millions of Americans.
New retirement savings options will be on the horizon in 2019 for millions who don’t have access to workplace 401(k) plans. Meanwhile, Congress will try to agree on a plan to avert sharp cuts in traditional pension benefits for over a million workers. The long-running battle over regulation to protect investors will enter a new phase when the Securities and Exchange Commission issues new “best interest” rules governing investment advice. And the House of Representatives could take up legislation to expand Social Security.
Here is a look at crucial retirement policy topics to watch in the year ahead.
Workplace retirement savings plans have proved to be the most effective route to help savers, mainly thanks to features like automatic enrollment, regular payroll deductions and matching employer contributions. Yet one-third of private sector workers had no access to an employer-sponsored retirement plan in 2016, according to the Government Accountability Office. The coverage shortfall is greatest among low-income workers and people working for small companies.
But 2019 will be a turning point in covering more workers.
Some states are starting programs that automatically sign up workers who don’t have workplace 401(k) accounts or Individual Retirement Accounts. Over time, employers in many of these states will be required to set up automatic payroll deductions for these accounts and enroll workers, although they will not need to make matching contributions.
Oregon started its plan this year; California and Illinois will start in 2019; Vermont, Maryland and Connecticut are preparing programs; and New York has passed legislation and is establishing a board to oversee the start of a state program over the next two years. And this week, New Jersey’s General Assembly passed legislation authorizing the creation of a program (the state’s Senate is expected to consider the bill early next year).
The states that have approved plans could eventually extend coverage to 15 million workers, AARP estimates.
California’s plan alone could cover 7.5 million workers, officials there say. The CalSavers program is in a pilot phase through the end of June, and will be open to all employers beginning July 1; mandatory compliance will phase in with three waves based on employer size.
“The goal is to make sure we stem the tide of the retirement crisis and help Californians realize the dream of a golden retirement,” says John Chiang, the state treasurer. “It’s not an easy task, because the current marketplace has failed.”
Meanwhile, Congress will take up legislation next year that would make it easier for employers to band together to join a single 401(k) plan that they can offer to employees. These “open multiple-employer plans” would be offered by private plan custodians; the aim would be to offer employers low-cost plans featuring simplified paperwork.
How quickly would these multiple-employer plans be offered if legislation were approved? “Plan providers will need a year to gear up and get infrastructure in place,” predicts Kathleen Coulombe, a vice president at the American Council of Life Insurers, which supports the legislation. “I’d expect to see plans launch starting in 2020.”
Which approach is better — auto-I.R.A. or a multiple-employer plan? “They are both good ideas, and there’s no inconsistency between them,” says Mark Iwry, one of the architects of a national auto-I.R.A. program that he worked to enact during his time as a senior adviser to the Treasury secretary in the Obama administration. The national auto-I.R.A. would require employers without their own retirement plan to enroll workers.
Mr. Iwry, currently a nonresident senior fellow at the Brookings Institution, sees the two ideas as complementary, with auto-I.R.A.s serving as starter accounts likely to lead many more employers to adopt 401(k) plans.
But Mr. Iwry said the market already had achieved much of the economy of scale and reduced costs promised by multiple-employer plans, with companies sponsoring identical plans using a single low-cost investment lineup and common record-keeping and administration. “The proposed open M.E.P. legislation is desirable and long overdue,” he said. “But in their potential to expand coverage, open M.E.P.s don’t hold a candle to auto-I.R.A.s.” That is because auto-I.R.A. programs achieve big gains in plan participation through mandatory employer participation features and automatic worker enrollment; with open M.E.P.s, takeup will depend on whether financial service providers market them aggressively, and employers’ appetite to sign up. What’s more, not all of these multiple-employer plans will use auto-enrollment.
Mr. Iwry still holds out legislative hope for a national auto-I.R.A. program, noting that the bill’s longtime lead Democratic sponsor, Representative Richard Neal, of Massachusetts, is about to become chairman of the powerful House Ways and Means committee.
Saving one million pensions
A special congressional committee is racing to head off an insolvency crisis, one that could lead to sharp cuts in pension benefits for over a million workers and retirees, and sink a federally sponsored insurance backup program.
The problem centers on so-called multiemployer pension plans. Over 10 million workers and retirees are covered by 1,400 of these plans, which are created under collective bargaining agreements and jointly funded by groups of employers in industries like construction, trucking, mining and food retailing.
Plans covering 1.3 million workers and retirees are severely underfunded — the result of stock market crashes in 2001 and 2008-9, and industrial decline that led to consolidation and sliding employment. Cheiron Inc., an actuarial consulting firm, recently forecast that 121 plans might fail within 20 years. Plans are underfunded by a total of $48.9 billion, the firm estimated. Three plans alone account for 65 percent of all unfunded liabilities, led by the Teamsters’ Central States fund, which is falling short by $22.9 billion.
Meanwhile, the Pension Benefit Guaranty Corporation, the federally sponsored insurance backstop for defunct plans, projects that its multiemployer insurance program will run out of money by the end of the 2025 fiscal year, absent reforms.
Congress approved an overhaul in 2014, the Multiemployer Pension Reform Act, but the legislation has faced strong resistance from retiree organizations, consumer groups and some labor unions.
The act allows troubled plans to seek government permission to make deep benefit cuts, if they can show that the reductions would prolong the life of the plan. Benefit cuts vary widely depending on what a plan proposes and the tenure of the worker — but a worker with 25 years of service and a $2,000 monthly benefit could see that benefit cut to as low as $983, according to a cutback calculator created by the Pension Rights Center, an advocacy group. To date, nine plan restructurings have been approved.
This year, the special congressional committee appointed to create a replacement for the pension reform act missed an end-of-November deadline to issue its recommendation. But a draft proposal raises the guaranteed minimum benefits paid by the Pension Benefit Guaranty Corporation if a plan fails. It also would inject federal funds into the agency — perhaps $3 billion annually — to expand its partition program, which allows it to take on benefit payments to so-called orphans — people who earned benefits from employers who have dropped out of plans, often because they have gone out of business.
“It would rely less on cutting benefits, and more on raising money from existing pension plans and taxpayers,” says Joshua Gotbaum, a guest scholar at the Brookings Institution and a former director of the federal pension backstop.
The sticking points in the discussion have included the assumptions used to measure plan liabilities, and how much respective stakeholders, including the government, should contribute to maintain a viable multiemployer system, says Karen Friedman, executive vice president of the Pension Rights Center. “We’re hoping they can find a fair, comprehensive solution that can save these plans, the P.B.G.C. and protect workers and retirees.”
Protecting investors from conflicted advice
The long-running battle to require brokers to look out for the best interests of clients will continue in 2019.
The S.E.C. is moving toward adoption of a “regulation best interest” standard following the end this year of an advice standard created by the Obama-era Labor Department. That regulation, which required advice on retirement accounts to meet fiduciary standards, was opposed by the financial services and insurance industries, which argued that it made advising smaller investors too costly.
The S.E.C. rule would require brokers to put their customers’ financial interests ahead of their own, but it does not require them to act as fiduciaries. The rule also would require disclosures to clients of any potential conflicts, and it reaffirms existing higher standards for registered investment advisers.
The draft regulation has come under fire from consumer advocates who note that it does not clearly define the term “best interest,” and that the proposed disclosure forms are confusing for investors.
“There is a real need to simplify the disclosure forms so that they communicate effectively to investors the information that they actually need to make decisions,” says Cristina Martin Firvida, vice president for financial security and consumer affairs at AARP.
Expanding Social Security
Proposals to overhaul Social Security by progressives are likely to get a hearing in the new Democratic-controlled House.
Most of the winning Democratic candidates who flipped 40 congressional seats in the midterm elections ran on expanding Social Security benefits, said Nancy Altman, president of Social Security Works, a progressive advocacy group. And the likely new chairman of the Ways and Means Social Security Subcommittee, Representative John B. Larson, Democrat of Connecticut, is the author of expansion legislation that has more than 170 co-sponsors in the House, including Mr. Neal, the incoming Ways and Means chairman.
“The Larson bill certainly will get a hearing, and there’s a substantial chance it will move out of committee and even get a vote on the House floor,” Ms. Altman predicted. “That will really elevate the issue and put a spotlight on the Senate and the White House.”
Mr. Larson’s bill includes a 2 percent across-the-board increase in benefits, a more generous annual cost-of-living adjustment and a higher minimum benefit for low-income workers. The bill would pay for the expansion by lifting the cap on wages subject to taxation and a gradual phase-in of a higher payroll tax rate.
Social Security faces a long-run financial imbalance — the program is now spending more than it takes in annually in payroll taxes. The Social Security trustees project that the program will be unable to pay full benefits beginning in 2034; unless Congress takes action, benefits would be slashed by about 25 percent. The funding proposal in Mr. Larson’s bill also would restore the program’s long-range financial balance.
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