A Crisis Ahead
Save 10, Run 401 for retirement
Special to the Arkansas Democrat-Gazette
Editorial on 06/27/2019
There’s a looming crisis in America as many baby boomers head into retirement without pensions or savings, relying instead on inadequate social security income. According to the GAO, 29% of households aged 55 and older have neither a pension plan nor any retirement savings.
Congress tasked itself with fixing the crisis, but the pending federal legislation looks mostly inconsequential. Importantly, the job of saving for retirement still rests on our shoulders. It’s time for us to take bold action by committing to save 10% of our pay for retirement. It’s also time for employers who don’t offer retirement plans to stop procrastinating. Set up a 401(k) now, so all your workers can easily payroll deduct money for their retirements.
On May 23rd, the House passed The Setting Every Community Up for Retirement Enhancement Act of 2019 (The SECURE Act), nearly identical to the Senate’s Retirement Enhancement and Savings Act of 2019 (RESA). There’s bipartisan support for this legislation, which is rare these days, and a final version of these bills seems likely to be signed into law later this year.
The retirement bills represent a grab bag of ideas, some good and some bad, thrown together to appease special interests and advance the ball down the field incrementally. But let’s be clear: there isn’t anything in these bills that will meaningfully expand retirement plan availability, participation or savings rates. There’s nothing that will ensure that more Americans will retire with dignity.
The most troubling provision in the bills would open the door to annuity sales in 401(k) plans by allowing employers to offer them without taking on legal liability. Annuities are insurance products that enable you to trade a portion of your retirement assets in return for guaranteed income. Annuities are not inherently bad. They are, however, complex financial products with high fees and are difficult for most people to evaluate. Folks can already purchase an annuity on their own after rolling their 401(k) into an IRA. At best, this provision is a subtle change. At worst, it lets the foxes into the henhouse to sell complicated and opaque annuities to retirees.
The most exciting provision in the bills would increase tax credits for 401(k) plan startup costs to as much as $5,000. An additional credit of up to $500 would be available for start-up plans with an automatic enrollment feature. If you’re a business owner worried about the cost of a 401(k), the increased tax credits just might get you over the hump. The bills would also allow two or more unrelated companies to form pooled employer plans, likely administered by a 3rd party sponsor, potentially lowering overall costs.
There are many other aspects of the bills that are head scratchers, most notably a provision raising the age at which retirees must take required minimum distributions from retirement accounts from 70 ½ to 72. Is there really a problem with people having so much retirement income that they don’t want to take money out of retirement accounts until they’re 72? No, this is only relevant to a wealthy few.
But I wouldn’t look to Washington for solutions. I think two simple grass roots efforts might help solve the retirement crisis, but we cannot delay. First, I propose a national call to “Save 10.” I ask everyone to commit to save at least 10% of their gross pay for retirement. There are many folks struggling to put food on the table and pay rent on minimum-wage incomes. Every little bit of savings feels like it’s cutting into bone. I don’t take this lightly and I know it will be a real challenge for some families to save 10% of their income. But I also know it’s a struggle for retirees to make ends meet on just social security income.
Second, I ask that every business owner in America “Run a 401k.” It sounds more exhausting than running a 5k but trust me, it’s not. Set up a 401(k) plan for your business. There are many great, new low-cost 401(k) options for even very small businesses. I believe 401(k)s can be less expensive than feared, relatively simple to manage and can provide significant long-term benefits to both the owners and the employees. Yes, there are administrative costs and employer contributions into participant accounts. It’s likely, though, that a 401(k) will more than pay for itself in employee satisfaction, productivity and retention.
The fact that Democrats and Republicans in Congress appear to have come together in bipartisan support of bills to help improve retirement plans probably speaks to the undeniable challenges we face. I hope The SECURE Act and RESA represent the first steps toward real public policy solutions to the retirement crisis. But let’s not wait – let’s Save 10 and Run a 401k. Let’s go.
Tim Quillin is a chartered financial analyst and a partner at Aptus Financial in Little Rock.