New bipartisan legislation designed to spur greater workplace retirement savings and the creation of more plans is being considered for inclusion in the omnibus federal budget measure.
The Retirement Enhancement and Savings Act (RESA), introduced Thursday by Senate Finance Committee Chairman Orrin Hatch (R., Utah) and ranking minority member Sen. Ron Wyden (D., Ore.), contains numerous incentives and tools to encourage workers to save more realistically and aggressively for retirement, along with incentives for employers to offer retirement plans.
With 10,000 baby boomers reaching age 65 daily and many of them needing assistance in boosting their retirement security, the need for Congress to include this bill in the omnibus budget package is clear, said Dirk Kempthorne, president and CEO of the American Council of Life Insurers.
“American workers need greater access to employer-sponsored 401(k) plans that will help them save for retirement,” Kempthorne said. “They need information about their savings and access to lifetime income solutions, like annuities, that will turn their savings into a personal pension.”
Congressional negotiators may take up the omnibus spending measure next week. They are aiming to complete work on the massive $1.2 trillion bill and pass it before March 23, when the fifth stopgap funding measure of the fiscal year expires. Before they do, they’ll need a deal on which policy issues to include.
To encourage the creation of more workplace retirement plans, the bill would provide small businesses with a plan credit of $5,000 toward start-up costs, in addition to lowering regulatory barriers to allow more businesses not yet ready to start their own plan to join multiple-employer plans (MEPs). MEPs can help smaller businesses achieve economies of scale, especially with plan administration and legal costs.
To prompt both employers and employees to increase worker savings, the bill would use a tax credit for employers that includes auto-enrollment in their workplace retirement plans. It would also encourage higher limits on automatic employee contributions. The bill would remove the 10 percent cap on automatic employee contribution rate increases, allowing employees to automatically save more for retirement yearly. There would also be an opt-out provision for employees who choose not to participate or increase contributions. Furthermore, employers would qualify for a $1,500 tax credit for adding auto-enrollment to a new or existing employee retirement plan.
To encourage greater savings, the bill would also allow plans to use lifetime income disclosure. This provision would help participants better understand the practical results of their retirement plan by providing an illustration of how their savings account balance translates into monthly lifetime income in retirement. The calculation would be similar to the federal Thrift Savings Plan annual statement illustration, which shows federal government employees how much monthly income their savings will generate in retirement. It also provides employers with a safe harbor when offering plan participants the option of electing to take a portion of their retirement savings as an annuity.
Reduced regulatory requirements in the bill are aimed at encouraging more employers to offer annuities in their retirement plans. Specifically, the bill would clarify the current safe harbor provision in ERISA that mitigates employer concerns about adding an annuity option to their retirement plan offerings, the American Council of Life Insurers said in a statement. Currently, employers are required to make a determination about whether “an annuity provider is financially able to make all future payments under an annuity contract.” The bill would allow employers to rely on the state insurance commissioner analysis and specific insurer representations regarding the plan’s status in relation to state insurance regulation and enforcement. Employers will still be obligated to “prudently select” an annuity and an annuity provider, but the change allows more employers to offer an annuity option to their employees.
The bill would also give employees who participate in a plan greater lifetime income portability. The legislation permits participants to roll over lifetime income options to an IRA that provides the same or similar lifetime income protection.