President Barack Obama has shown himself to be a big supporter of retirement options for all Americans and his 2017 budget proposal, released Tuesday, reflects that.
“I was encouraged by the amount of work and effort, a very specific amount, around retirement issues,” says Kevin Crain, managing director and head of workplace financial solutions at Bank of America Merrill Lynch. “In previous budget submissions, the president tried to address retirement. In this one, more universal types of solutions are being looked at.”
The new budget reinforces ideas that were put forth in other years’ budget proposals, like auto IRAs, personal IRAs that would be available to all Americans through their workplace, and state-run 401(k) plans that would make retirement savings available for individuals who don’t have access to a plan at work.
The proposal would provide tax cuts for auto-IRA adoption and for businesses that choose to offer more generous employer plans or switch to auto enrollment. The auto-IRA initiative would provide any employer with 100 or fewer employees that offers an auto-IRA a tax credit of up to $3,000. The President also proposes to triple the existing ‘startup’ credit so small employers who newly offer a retirement plan would receive a tax credit of $4,500, enough to offset administrative expenses.
The White House said in its budget proposal that several states have created their own auto-IRAs or retirement marketplaces connecting small businesses and their employees to existing investment vehicles, with about 20 more considering similar measures or an alternative approach that would create a state-based 401(k).
“The Department of Labor has proposed regulations and issued guidance to provide a path forward for state retirement savings programs consistent with the Employee Retirement Income Security Act (ERISA). To further state efforts, the budget sets aside $6.5 million to allow a few states to pilot and evaluate state-based 401(k)-type programs or automatic enrollment IRAs,” the budget said.
In the new budget, Obama also makes a case for open multiple employer plans. MEPs already exist, but he takes the concept a step further, eliminating the commonality and “one bad apple” provisions.
Under the current rules, organizations have to be in the same industry or same geographic location to belong to a MEP. If one of the businesses involved in the plan does something wrong, everyone in the plan pays the penalty.
By eliminating the commonality provision, it will encourage small employers to open and promote these 401(k) plans, says Crain. “The one bad apple rule is a pretty strong impediment to the use of MEPs,” he says. Eliminating it would allow employers who are doing the right thing to continue doing what they are doing while only the companies that are not in compliance are penalized, he says.
Quote"The one bad apple rule is a pretty strong impediment to the use of MEPs."
“That’s a major structural change that has to take place,” says Crain.
“As an added benefit, if an employee moves between employers participating in the same open MEP, or is an independent contractor participating in a pooled plan using the open MEP structure, then he can continue contributing to the same plan even if he switches jobs,” the White House said.
The budget also funds pilots for states and nonprofits to design, implement and evaluate new approaches to expand retirement and other employer-provided benefit coverage, with a focus on developing models that are portable across employers and can accommodate contributions from multiple employers for an individual worker.
The budget also would allow long-term unemployed people to withdraw up to $50,000 a year from their retirement accounts, for two years, so they can draw upon their savings and not go further into debt trying to make ends meet.
In his 2017 budget, Obama said he would like to extend employer-based retirement plans to long-term, part-time workers, “putting us on a path to more portable benefit models.”
“We are definitely in support of opening the system up as broadly as possible. What will be interesting to watch there is which vehicles do you use to get part-timers to participate in plans and what is the longevity of part-timers in these plans?” Crain says.
While he is not opposed to auto IRAs, like the President’s myRA proposal, Crain believes MEPs within a 401(k) structure offer more of a benefit to small employers.
MEPs give small companies something they can’t get on their own: institutional buying power.
With an open MEP, “a small employer is not left to his own devices trying to search the marketplace on his own, to search for a service provider,” he says. MEPs allow small employers the use of greater infrastructure, have fewer costs and reduce their fiduciary liability.
Crain says that he is hopeful that even if the retirement provisions in Obama’s budget don’t remain in the final version, Congress will eventually pass laws that will allow for the same opportunities.
He pointed out that there are several bills circulating in Washington that would support multiple employer plans and other retirement initiatives and remains confident some of them will pass eventually, even if the budget bill does not.
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