(Dow Jones) Good, but not enough. That's how academics and advisors characterize President Barack Obama's plans to help Americans save more for retirement.
Obama wants to expand tax credits that reward retirement savers, and he wants to require all employers to provide workplace-based retirement savings plans, the so-called automatic IRA.Many of the measures are based on sound research conducted by renowned behavioral finance experts, and they'll help middle-class Americans, some experts say. But experts also say the measures don't go far enough, and they ignore other equally large-if not larger-financial issues.
"Generally, I think the proposals could be helpful in strengthening the retirement security of working Americans," said Jodi DiCenzo of Behavioral Research Associates. "As with anything, the details are important."
Here's a closer look at some of Obama's retirement-related proposals and what experts had to say in response.
Expanding The Saver's Credit
The Obama administration is proposing to expand and simplify the saver's credit by matching 50% of the first $1,000 of contributions by families earning up to $65,000 and providing a partial credit to families earning up to $85,000. The Obama administration also wants to make this tax credit refundable even if the taxpayer has no income tax liability.
DiCenzo said those measures would go a long way toward promoting retirement security.
"More than 40% of taxpayers who took the saver's credit at the 50% rate had their credit limited by their tax liability," she said, citing early research on the credit. The researchers also noted that had these taxpayers made the maximum contributions eligible for the credit, 89% would have had their credit limited by their tax liability. Making the credit refundable will solve this problem, DiCenzo said.
However, some of the tax credit's problems are not addressed by Obama's proposals. Those include the process by which taxpayers claim the credit, and the fact that not enough people are aware it exists.
"The proposal simplifies the calculation, but does it simplify the hoops that taxpayers have to jump through to claim the credit?" DiCenzo said. Research shows, for instance, that 34% of all eligible taxpayers who could have claimed the credit didn't.
Other research, released by Transamerica in 2008, showed that more than 80% of American workers with household incomes less than $50,000 weren't even aware of the saver's credit.
"This doesn't mean that their tax preparer didn't claim it for them if they were eligible, but it certainly does suggest the credit wasn't a factor in motivating saving behaviors," DiCenzo said.
What changes would DiCenzo like to see? "It would be great if there was a way to make the credit automatic and immediate because immediate incentives are more effective than ones that are delayed."
Still, despite those issues, DiCenzo said Obama's proposal is an improvement over the current credit.
Obama wants employers who do not currently offer a retirement plan to enroll their employees in a direct-deposit IRA unless the employee opts out. Such a plan would, in effect, create employer-sponsored retirement plans for 78 million workers-the roughly 50% of working Americans who presently don't have a plan at work.
Under the plan, workers would automatically have 3% of pretax earnings go into an IRA. The worker could increase the amount of the automatic deposits, or opt-out altogether. The money would either be placed into a diversified portfolio or the worker would have the option to invest that money as he or she sees fit.
Gregory G. Seals, director of fixed income and behavioral finance at the CFA Institute, said that similar to the saver's credit, research has proven the use and value of the automatic IRA.
He said, for instance, that many of the ideas behind proposed changes to defined-contribution savings plans, 401(k)s and other self-directed retirement plans come from the field of behavioral economics and more particularly from Richard Thaler and Cass Sunstein's book "Nudge."
"The focus of their research and recommendations for individually directed savings plans recognizes that humans routinely make irrational economic decisions and that they can be encouraged to make better financial decisions which improve their retirement security, " Seals said.
According to Seals, proponents of plans such as the automatic IRA argue that many individuals do not have the financial knowledge necessary to choose reasonable asset allocations, so the default portfolio should recognize this reality as well as the documented decision errors that humans make with regard to their investments.
The Obama administration is also calling for improving the transparency of 401(k) fees to help workers and plan sponsors make sure they are getting investment, record-keeping, and other services at a fair price and promoting the availability of annuities and other forms of guaranteed lifetime income, which transform savings into guaranteed future income.
Not surprisingly, many who believe Americans haven't done a good job of building their own pensions are praising the latter proposal.
Not Far Enough
For his part, Norman Ehrentreich, Ph.D., the owner of Ehrentreich LDI Consulting & Research, said: "I generally welcome these suggestions as they could help workers to better prepare for retirement. But I think that given the extent of our retirement problem, they do not go far enough and will not substantially increase retirement security."
Two problems require attention, he said. One is the decline of the defined-benefit plan. Second, "Many Americans do not save enough to maintain their desired standard of living in retirement," he said.
According to Ehrentreich, Obama's retirement-security initiatives are aimed mostly at the under-saving problem, and they do not address the defined-benefit pension problem.
"Since Obama's suggestions are likely to increase savings rates and encourage participation in workplace retirement plans, I welcome them," Ehrentreich said. "But how efficient will they be and will they go far enough?"
Annamaria Lusardi, a Dartmouth University professor and director of The Financial Literacy Center, also said the Obama administration's proposals address some issues, but not others.
"The proposal to promote retirement savings and financial security after retirement is very important," she said. But Obama also needs to turn his attention to debt and debt management. Those are important problems as well, she said.
In addition, Lusardi wants more done with regard to financial education. "A way to promote financial security is to promote financial education, so that people can make sound decisions not only about pensions but also mortgages, annuities and how to invest their pensions and to avoid the mistakes we have witnessed in this crisis," she said.
Others, meanwhile, had a completely different view of the Obama administration's retirement security proposals.
"This is more smoke and mirrors," said Mark Matson, founder and chief executive of Matson Money. "The greatest threat to anyone's retirement is a stagnant economy and a lack of job security. No job, no retirement ... These measures are like putting bandages on a patient dying of a heart attack."
To Matson, the best way to alter and perhaps improve upon the Obama administration's proposals would be "stop every entitlement program and encourage personal responsibility and accountability."
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