Universal retirement savings plan is next up for fierce debate

If workers had their say, they would readily vote in favor of the Retirement Savings for Americans Act, a bill that is expected to ignite fierce industry debate. The proposed legislation would require all employers across the land to enroll their workers in a federal retirement savings program if they don't have a savings plan to offer their employees.

The envisioned American Worker Retirement Plan would be open to all full- and part-time workers without access to a workplace sponsored plan. Workers would be enrolled at a deferral rate of 3% of their salary and would be able to choose from a mix of investments, including fixed income and stock index funds as well as a life cycle or target-date fund. Low- and medium-income workers would also receive a federal matching contribution in the form of a refundable tax credit of up to 5% of their income, which would be deposited directly into their retirement accounts.

Such a plan would meet the retirement-plan fantasy wish list of American workers who in a recent survey said they favored government mandates requiring employers to offer retirement plans and make matching contributions. The survey of 736 U.S. workers conducted by Natixis Investment Managers in January and February showed that 81% believed that employers should be required to offer workplace plans and 78% supported requiring employers to make matching contributions. More than 2 in 3 workers (67%) said they believed the government should provide universal access to retirement plans.

While the Retirement Savings for Americans Act parallels workers' wishes, it is facing skepticism and industry opposition, with early critics saying it will drive business away from providers serving private-sector plans.

The bipartisan, bicameral bill was introduced in December by U.S. Sens. John Hickenlooper (D-Colo.) and Thom Tillis (R-N.C.) and U.S. Reps. Terri Sewell (D-Ala.) and Lloyd Smucker (R-Pa.), but has been largely overshadowed by the SECURE 2.0 Act, the landmark retirement security legislation that was signed into law on Dec. 29. Mr. Hickenlooper is planning to reintroduce the bill, his press secretary Kaitlin Hooker said.

Because of the industry's focus on SECURE 2.0, many industry groups haven't yet formalized their official positions but indications are that it will touch off fiery opposition and debate when it's reintroduced.

Modeled after the federal $720 billion Thrift Savings Plan for federal government employees, the proposed plan attempts to address the so-called coverage gap for the estimated 63 million to 80 million Americans who don't have access to workplace retirement plans, a problem that has long vexed the industry.

"The fundamental challenge of our retirement system now is a lack of participation and a lack of market access for a very large segment of the workforce," said John Lettieri, president and CEO of the Economic Innovation Group in Washington, adding that the lack of coverage results in a "very significant savings gap between higher-income and lower-income workers."

To address the coverage issue, many states have launched state-run auto-IRA programs for private-sector workers without workplace retirement plans but such programs aren't expected to close the coverage gap.

Teresa Ghilarducci, a professor of economics and policy analysis at the New School for Social Research and a longtime proponent of a universal retirement plan, touted the legislation as an improvement over SECURE 2.0, which she said "doesn't get anywhere near" the universal coverage that the RSAA would achieve.

Unlike SECURE 2.0, the proposed legislation would cover gig workers, independent contractors and platform workers who sell their wares and market their services on platforms like Etsy and Care.com.

"Those platforms will be required to set up accounts so that the workers on those platforms can put in money every time they get paid for a product or get paid for a gig," Ms. Ghilarducci said, noting that a half million people get most of their money from selling their products on Etsy.

Skeptics and critics of the bill want to give SECURE 2.0 a chance to kick in because the recently enacted legislation offers employers new and enhanced incentives to adopt workplace retirement plans, including stronger tax credits. SECURE 2.0 also includes a host of measures to enhance plan participation, such as requiring all new 401(k) and 403(b) plans to automatically enroll employees.

"We need to at least let the provisions in SECURE 2.0 take effect and allow them to be implemented for several years before we go down this road of providing a government program that has a competitive advantage over the private sector," said Will Hansen, chief government affairs officer at American Retirement Association in Washington.

It's a thought that Mr. Lettieri rejects. Waiting a few more decades for the system to work for the millions of workers who are most in need of a retirement plan is "not a coherent response" to the large access gap, he said.

"I reject the notion that SECURE 2.0 is as far as we should go," Mr. Lettieri said.

While SECURE 2.0 will close the coverage gap incrementally on the margins, "nobody believes it will fully solve the problem," he added. "Nobody believes that."

The Insured Retirement Institute, an industry group that hasn't yet taken a formal position on the bill, agrees that the coverage gap is an issue for private-sector workers but isn't convinced that Mr. Hickenlooper's bill is the way to go, said Paul Richman, chief government and political affairs officer at IRI in Washington.

Instead, IRI is leaning toward a bill that ranking member Richard Neal (D-Mass.) from the House Ways and Means Committee has advocated since 2016. His auto-IRA bill would require employers with five or more employees to offer a retirement plan, a measure that is expected to produce $7 trillion in additional retirement savings over the next 10 years and generate 62 million new retirement savers, according to Mr. Richman.

"We think the Neal bill utilizing the current private-sector retirement system without creating a new federal-run system addresses the same problem that the Hickenlooper bill is trying to address," Mr. Richman said.

Mr. Richman is also concerned about the cost of creating a "new federal bureaucracy at the Treasury Department to run the program" and the cost of the matching contributions offered as refundable tax credits, costs that the Neal bill does not incur to the federal budget.

"That's one thing that's not in this bill is how are they going to pay for it?" Mr. Richman said, referring to the RSAA.

The proposed refundable tax credit for workers earning below median income consists of a 100% match on contributions up to 3% of their income and a 50% match on the next 2%. It also includes a 1% automatic contribution, for a total potential maximum contribution of 5%.

The match and auto contribution begin to phase out by $75 for every $1,000 of additional income above the median. If the median income were $45,000, for example, someone making $60,000 who put in the needed amount to get the maximum 5% contribution of $3,000 would receive $1,125 less.

ARA's Mr. Hansen, who strongly opposes the proposal, sees the plan as an attack on the private sector that will drive away business.

"It is government unfairly competing against the private sector when it comes to retirement plans," he said. "It's basically the government saying that the private sector is not satisfying its duty in providing retirement plans so we're going to provide a product that has competitive advantages over the private sector."

Mr. Hansen noted, for example, that the proposed government plan would not be subject to many of the rules and regulations under ERISA and the Internal Revenue Code, a criticism that EIG's Mr. Lettieri scoffed at because ERISA does not apply to government programs, including the Thrift Savings Plan.

Mr. Hansen also noted that the proposed matching tax credit gives the government plan an unfair advantage over private-sector plans.

"If I'm an employer providing a plan to my employees right now, why should I continue to do so?" Mr. Hansen asked. "If the government is going to provide a matching contribution, I'm going to shut down my plan and my rich match that I give, and I'm going to go to the government program that is providing a match to my employees."