Feel-Good Retirement Savings Initiatives
Over the Labor Day weekend, the Obama administration announced some new retirement savings initiatives that are supposed to help Americans save money for their retirement. Although they are all well intentioned, I doubt they will have a material impact on the overall picture of retirement savings in America. I call them feel-good measures because the new initiatives merely clarify existing laws and regulations. Let's look at them one by one.
1. Sample language for 401k plan auto-enrollment. The IRS gave employers some sample language for adding auto-enrollment to their 401k or SIMPLE IRA plans. The IRS also made it clear it's legal to automatically increase the employees' contribution percentages.
Half of the workforce does not have a retirement savings plan at work. Auto-enrollment can't help if you don't have a plan to begin with. For the other half, the employers will still have to take the trouble to add auto-enrollment. After that, auto-enrollment usually only covers new employees. Employers very rarely re-auto-enroll existing employees if they are not already enrolled. So we are only talking about a low single digit percent of the workforce here.
Changing somebody's paycheck is always tricky. According to a recent study by Vanguard, only 20% of the plans have auto-enrollment at the end of 2008. Of the plans that have auto-enrollment, the typical default contribution percentage is 3% of pay. 3% is better than 0%, but it is still far too low.
2. Buy I Bonds with tax refunds. The IRS will add a checkbox to the tax form and upsell taxpayers on purchasing I Bonds with their tax refunds, in the same way airlines sell seat upgrades and travel insurance.
If the taxpayer wanted I Bonds for their tax refund, they can always buy the bonds themselves after they get the refund. The checkbox on the tax return just makes it a little easier. However, the I Bonds bought with tax refund are still subject to the same $5,000 per year per person paper bond purchase limit. They still can't be sold until after 12 months. Some people are due for a surprise.
3. Contribute unused vacation to 401k plan. When you leave your job and you have unused PTO hours, you can turn them into 401k contributions instead of getting paid in cash.
Once again, you have to have a 401k plan to begin with. Then your employer will have to amend the plan and allow it. Finally, the contributions from unused PTO hours still count toward your annual contribution limit unless the employer eliminates the cash-out option and automatically shoves the unused PTO hours to the 401k plan. I can't see many employers will choose to do that.
This might help some people who won't have a 401k plan in their next job and don't need the money when they leave their current job. Again, we are talking about a small percentage of people here.
4. New Special Tax Notice about rollovers. The IRS published two new model tax notices for 401k plan distributions when people leave their jobs.
The new notices make rollover sound like the default option and downplay the cash-out option. I don't know if people actually read the notice in their paperwork. It's all nice and well if people read it. I'd also like to know if people who cash out their 401k plan now didn't know about the rollover option or they knew it and still chose to cash out. If it's the latter, the new tax notices won't do any good.
I would much like to see our government stop dancing on the edges and put forward some real reform. I realize the real reform has come from the legislature. Maybe President Obama can push for it after he's done with health care.
How about unleashing that "public option" called the TSP? Let companies who don't have their own plan subscribe to the TSP. That will cover half of the workforce in one fell swoop. Let employees choose between the employer's plan and the TSP. Give some real competition to the high cost plans.
How about liberating the market-based solutions called the IRA? Increase the IRA contribution limit and let people choose between the IRA and their 401k plan. Allow rollovers to an IRA at any time.
What about the company match? If the employer makes the match immediately vested, the match can follow to the TSP or the IRA. If the employer wants to impose a vesting schedule, the match can stay in the employer plan. It's not that hard.
Software picked, likely related posts:
- Reforming the 401k: Good Ideas and Bad Ideas
- Retirement Plans Galore: 401(a), 401(k), 403(b), 457, SEP, SIMPLE
- Overbalancing Continues
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