Employer mandate for offering a retirement plan faces headwinds

A proposal to require employers that don't offer retirement plans to automatically enroll employees in individual retirement accounts or 401(k)-type plans could be a "game changer" for the nation's retirement landscape, sources said.

But while retirement security is typically one of the few bipartisan issues left in Washington, the automatic retirement plan proposal only has the backing of Democrats, which could complicate future negotiations on retirement security legislation, like a SECURE Act 2.0 package.

The House Ways and Means Committee in a 22-20 vote advanced the automatic retirement plan proposal on Sept. 9. The vote was part of a markup where the committee considered a series of legislative proposals under a budget reconciliation process. The markup was part of Democratic efforts to pass a $3.5 trillion social spending plan aimed at addressing climate change; expanding Medicare, paid family and medical leave and child-care options; and establishing universal prekindergarten, among other items.

If signed into law, the measure — which would take effect Jan. 1, 2023 — would require employers to offer a 401(k) or IRA, with exceptions for governments, churches and companies with five or fewer employees or less than two years in business. It does not cover employees under 21, and any employee can opt out.

Qualified employees would be automatically enrolled in the plans — with target-date funds as the default option — at a 6% contribution rate that would be increased — unless the participants opts out — by 1 percentage point each year until it reaches 10%. For IRAs, the Internal Revenue Service contribution limit is $6,000 for most people and $7,000 for people over 50.

Employer contributions would not be required, but failure to offer a plan would incur an excise tax of $10 a day per employee. The smallest employers would receive tax incentives to offset startup costs.

The proposal would also require plans to offer participants with more than $200,000 in their accounts an option to take a distribution of at least 50% of their vested account balance in the form of a protected lifetime income solution.

Also included is a provision to make the saver's credit — a federal tax credit designed to incentivize lower-income working Americans to save for retirement — refundable so that people without any income tax liability are eligible to receive the benefit in the form of a contribution to their retirement account.

Melissa Kahn, Washington-based managing director of retirement policy for State Street Global Advisors' defined contribution team, called the proposal a "game changer" because it would "dramatically" increase the number of people with access to a workplace retirement plan. Retirement experts often talk about getting people to save more for retirement and the best ways to manage retirement assets, she said. "But if you don't have access to a plan, you never get to any of those other issues, so that's why we think this is such a critical proposal," Ms. Kahn said.

Two-thirds of private-sector workers had access to employer-provided retirement plans in March 2020, including 52% with access to a defined contribution plan, according to data from the Bureau of Labor Statistics published in March. But with respect to workers whose wages were among the lowest 25%, the percentage dropped to 42% with access to a plan.

Too many employees, particularly those who work for small businesses, are still not covered by a plan, said Wayne Chopus, president and CEO of the Washington-based Insured Retirement Institute, which represents major insurers, money managers, broker-dealers and financial professionals, in a statement. "This puts too many workers in jeopardy of not saving enough for retirement, which can last 20 or 30 years or longer," he said. "We need to take additional steps to address the inequitable access to an effective means to accumulate retirement savings, and this legislation is a common-sense step to do just that."

The auto-enrollment provision that advanced Sept. 9 is based on a bill — the Automatic Retirement Plan Act — introduced in December 2017 by Ways and Means Committee Chairman Richard Neal, D-Mass.

Establishing automatic IRAs and enhancing the saver's credit would dramatically expand retirement savings, Mr. Neal said during the Sept. 9 markup. He cited data from the American Retirement Association, which found that implementing such proposals could add up to $7.3 trillion in additional retirement savings over a 10-year period and create more than 63 million new retirement savers.

"Now is the time to confront this issue head-on — the longer we wait, the worse the problem becomes, and millions more Americans will find themselves in untenable circumstances in their later years," Mr. Neal said.

But Republicans on the committee, wary of imposing requirements on business owners, opposed the measure. Rep. Kevin Brady, R-Texas, the committee's ranking member, called it a partisan approach. "Main Street now faces an onerous new mandate from Washington and a tax penalty if you don't comply," he said.

The partisan divide on the proposal is a departure from the usual harmony Republicans and Democrats display when it comes to retirement security legislation.

Congress in 2019 passed a major retirement package, the Setting Every Community up for Retirement Enhancement Act, or SECURE Act. In May, Mr. Neal and Mr. Brady introduced the Securing a Strong Retirement Act, also referred to as SECURE Act 2.0, which includes dozens of provisions aimed at boosting retirement security, like allowing 403(b) plans to participate in multiple employer plans and invest in collective investment trusts, creating a national online database of lost retirement accounts to reduce the number of missing participants, and making changes to qualifying longevity annuity contracts by removing the 25% cap — currently retirement savers can spend up to 25% of their account on a QLAC. The Ways and Means Committee approved the SECURE Act 2.0 package on May 5 by voice vote and awaits a vote by the full House.

"I believe that rather than taking a partisan approach that I think damages our ability in the future to work together and find common ground, I think we do so much better working together, and this committee has proven it time and time again," Mr. Brady said.

Mr. Neal said that it's not his intention to derail efforts on SECURE 2.0 and at a later point in the markup he guaranteed it would be signed into law by the end of the year. Despite the public differences on the automatic retirement plan proposal, sources are still optimistic the two parties will work together and pass SECURE 2.0 in this Congress.

"Although this was a partisan markup, the signs remain good for passage of 2.0 either this year or early next year," said Kent Mason, a partner with law firm Davis & Harman LLP in Washington.

Added State Street's Ms. Kahn: "There are bumps in the road, there are times when Republicans and Democrats have different priorities in the retirement space. It's one of the areas where there's a lot of bipartisan agreement, but there isn't always. They do seem to find their way back to bipartisanship, and I'm hoping that will be the case here."

Passage of the automatic retirement proposal is still far from a sure thing. Democrats are using a reconciliation process to pass the larger social spending bill, meaning they will need only a simple majority to pass it in the Senate instead of the usual 60 votes. Republicans have widely criticized the $3.5 trillion package, and none are expected to support it in either chamber. But some moderate Democrats have also expressed concern with the price tag and may seek to cut or pare down certain provisions before passage.