Stormy skies ahead: why the retirement crisis seems unfixable – and getting worseNews added by Benefits Pro on February 28, 2014

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By Paula Aven Gladych

Many fixes have been proposed to solve the retirement crisis in America but none has been the cure-all parties could wish for.

Numerous bills have been proposed in Congress that would add new layers to an increasingly complicated retirement system, including those that would reform both the public pension and defined contribution systems in the U.S. Along with that, President Barack Obama has asked the Department of Treasury to put together a program called myRA to help those workers save for retirement who don’t have access to an employer-sponsored plan at work.

But are any of these fixes going to help regular people save more for retirement or will the situation just become more complicated than it already seems to be, based on numbers that show only 50 percent of individuals with access to workplace retirement plans actually take advantage of them?

Add to this proposed tax reform legislation that could eradicate tax incentives for retirement accounts and the situation becomes even stickier.

A recent report by the National Institute on Retirement Security found that the average working household has virtually no retirement savings. When all households are included, not just those with retirement accounts, the median retirement account balance is $3,000 for all working-age households and $12,000 for near-retirement households, the report found.

Two-thirds of working households age 55 to 64 with at least one earner have retirement savings less than one times their annual income, which is far below what they will need to maintain their standard of living in retirement, NIRS stated.

Account ownership rates seem to be correlated with income and wealth, with more than 38 million working-age households, or 45 percent, who do not own any retirement account assets.

One problem is that people who don’t have access to a workplace plan may believe they have to set aside at least $2,000 a year into an IRA if they were to open one and most don’t have that kind of money to do that, said Dallas Salisbury, chairman of the American Savings Education Council and president and CEO of the Employee Benefit Research Institute.

There is a segment of the population that is very low income and constantly has difficulty meeting monthly expenses, he said. “Clearly a segment of the population does not have that ability. Having said that, what we have found in all of the surveys is that once people move to where they are at least able to cover expenses and you ask them if they would be willing to give up a few things to save $5 or $10 or $20 a week at fairly high rates of return, people say ‘Yes, I could do that.’”

Will the President’s myRA proposal speak to individuals like that since all of the information distributed about it emphasizes that people can put away as little as $5 at a time into these personal accounts?
“They are putting very heavy stress on the fact that the initial contribution is a very low dollar number and continuing contributions can be $5 a month or less,” Salisbury said. “It is possible. There’s a way to save on an advantaged basis no matter how little you can do.”

He added that the myRA proposal is an “interesting experiment to see if some of the historical advertising can be overcome.”

Salisbury pointed out that the Treasury department is the same group that has handled savings bonds for years. They found through that program that emphasis on small dollar amounts does achieve higher savings rates, he said.

The marketing around America Saves Week this year has focused not on hammering people about what they need to be saving but instead focusing on the importance of having a plan, setting a goal and just getting started, regardless of the small number. The goal is to get people saving for retirement as a habit and moving people in that positive direction, Salisbury said.

Anton Bayer, CEO of Up Capital Management in San Jose and Granite Bay, Calif., believes the myRA proposal is “clearly not needed and certainly doesn’t accomplish anything. We have an IRA account, a thrift savings account for the working poor,” he said. “There are plenty of ways for people to save on a tax-deferred or tax-favored basis.”

Bayer believes the myRA is structured in a way that does nothing to help lower income people. “They don’t need the ability to save post tax, they want their money tax free. They need money now. They need to pay bills. If you put money in a regular retirement account, you get a tax deduction or credit. If you put money in a myRA, there is no tax relief,” he said.

He believes the only way more people will begin to save for retirement is to encourage employers to offer retirement plans and, “if you are going to use taxpayer dollars to influence behavior, then encourage employers that don’t have a retirement plan,” he said.

More than 50 percent of employers offer some sort of retirement program. To get that figure to 90 percent or 100 percent, Bayer believes the government should offer tax incentives to employers to offer plans to employees.

Aaron Isenstark, co-founder and chief investment officer of IRON Financial in Illinois, believes the myRA proposal is “another political gimmick that makes it look like we’re trying to help the little guy,” he said. “Until you fix the problems that are out there, creating a new way to save becomes a political gimmick at best and just raises the cost of retirement for everybody as well as the small investor who can’t afford it.”

Someone has to administer these plans and the government is “potentially forcing savings at a smaller level when there already are 401(k) plans out there and individual IRAs out there and there’s already Social Security out there,” he said.
Izenstark believes the government would be better served in finding a fix to Social Security. Making sure it is solvent for many years to come.

“Until you fix that you will have more cost going into creating some new type of strategy that probably doesn’t benefit anyone and probably won’t get that many people to sign up in the first place,” he said.

A number of fixes have been proposed in the Legislature in the past year.

Sen. Orin Hatch introduced his Secure Annuities for Employee (SAFE) Retirement Act of 2013 as a way to overhaul public and private pension plans. The legislation would allow states to turn over pension plans and the ensuing tax benefits from local governments to insurance companies using fixed-annuity contracts. It also would shift ERISA oversight from the Department of Labor to the Treasury Department.The bill, which was introduced into committee, proposes a three-pronged approach to pension reform:
  • Development of a new public pension plan: the SAFE Retirement Plan, a state-regulated, fixed annuity product. Hatch described this as a market-based, fixed annuity solution with a consumer safety net. It would not be subject to federal taxes and would receive only minimal involvement from the feds. It would be voluntary.

  • It would create a separate private plan, the Starter 401(k), a retirement savings plan allowing workers to save $8,000 annually. The Starter 401(k) would allow account holders to save more than in a traditional IRA but wouldn’t require the employer to shoulder the administrative burdens of a traditional 401(k).

  • Remove Department of Labor oversight of investment products under ERISA and move jurisdiction of fiduciary rules to the Treasury Department. This provision is Hatch’s response to what he considers overreaching by the DOL in issuing a new, tougher fiduciary standard.
Sen. Tom Harkin, D-Iowa, unveiled legislation that would help tackle the retirement crisis in America and shore up the private pension system.

Called the Universal, Secure and Adaptable (USA) Retirement Funds Act of 2014, the legislation, if passed, would give the 75 million individuals in the country who don’t have access to a retirement plan at work a way to earn a safe, portable and secure pension benefit for life.

His legislation would create a new type of privately run retirement plan that combines the advantages of traditional pensions, including lifetime income benefits and pooled, professional management, with the portability and ease for employers of a 401(k).

“USA Retirement Funds would be 21st century retirement plans, run entirely by the private sector, that drastically reduce costs through professional management and risk sharing. Simply put, giving people without access to a quality employer-provided plan the opportunity to earn a retirement benefit would help ensure every American enjoys their golden years with the dignity and financial independence they deserve,” Harkin said in a statement.

Judy Miller, director of retirement policy for the American Society of Pension Professionals & Actuaries, said that her organization appreciates pieces of both Hatch’s and Harkin’s bills but doesn’t believe either one of them will be marked up as they are currently written.

ASPPA has always been supportive of an automatic IRA proposal which has been bandied about for a few years that would give people the option to have IRA contributions deducted automatically from their paychecks. President Obama’s myRA proposal is a step in that direction, she said.

“Having the myRA in place will make an auto IRA proposal easier to envision,” Miller said.

She added that nobody is sure any retirement bills will move forward this year. “There’s not a lot of optimism to get anything done but the bare minimum this year and retirement provisions don’t fit the category as much as we might like them to,” she said.

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