Our private pension system has accomplished a great deal. Employer-sponsored plans provide meaningful benefits to tens of millions of middle-income working families, supplementing Social Security, and have accumulated the largest pool of investment capital in history.
The greatest shortcoming of our system and main unfinished business of the Employee Retirement Income Security Act of 1974 is that it leaves far too many behind. Some 55 million working Americans lack access to an employer plan or any other convenient way to save at work. These include employees of small employers — most of which have chosen not to sponsor a plan — and independent contractors or other contingent, temporary or part-time workers.
Persuading reluctant employers to sponsor plans would be the ideal way to expand coverage. We've been trying and need to continue. But despite our best efforts, including additional tax incentives, the percentage of the workforce covered has remained essentially stagnant for decades.
That's why, in 2006, under the auspices of the nonpartisan Retirement Security Project, I co-authored with David John, then a Heritage Foundation senior fellow, a proposal to finally achieve a breakthrough in retirement coverage — supporting and enhancing the employer plan system rather than competing with it. Under our proposed "automatic IRA" — which has also been the template for most state-based programs — employers choosing not to sponsor a plan would simply let employees use their payroll system to save.
The employer's role in the auto-IRA would be only to act as a conduit — offering payroll deduction to make it easy for employees to save a portion of their wages in their own tax-favored IRA. Employees are automatically enrolled to save a modest percentage of pay, but are free to opt out or choose a higher or lower contribution within the IRA limits.
Employers connecting employees to payroll-deduction IRAs are not sponsoring a retirement plan or establishing a trust, and would make no contributions to the IRAs. Employers would have no responsibility to comply with ERISA or the tax qualification requirements that apply to plans to choose, manage or monitor investments, or to ensure employees' compliance with IRA limits. IRAs would be invested with those private-sector IRA trustees or custodians that choose to participate and are certified as providing reasonably low-cost target-date funds as the auto-IRA's default investment (unless employees opt for a principal-protected investment alternative or perhaps a third investment option).
Plan sponsors would not be part of the auto-IRA program. The smallest and newest employers also would be exempt.
An important purpose of the auto-IRA is to encourage more employers to adopt employer plans instead.
First, employers providing these automatic payroll deduction IRAs would receive tax credits designed to offset any administrative costs — although any such costs would be negligible — and these credits would be withheld from an employer if it were to drop an employer plan.
Second, small businesses that chose to sponsor a new plan (instead of an auto-IRA) would receive a much larger "startup" tax credit — reflecting our strong policy preference for tax-qualified, ERISA-governed retirement plans over IRAs.
Third, all employers would continue to enjoy far greater incentives to sponsor a retirement plan than an IRA: annual tax-favored employee contributions of up to $18,000 in 401(k)s, compared with $5,500 in IRAs ($24,000 versus $6,500 if age 50 or older).
Fourth, to further protect employer plans, employers would be precluded from making matching or other contributions to auto-IRAs (whereas employer plus employee contributions to 401(k) or other DC plans can reach $54,000; $60,000 if age 50 or older).
These factors — and employers' reluctance to impose a "take-away" on employees by abandoning an existing employer plan providing higher employee contributions and employer matching contributions — would help prevent auto-IRAs from competing with (much less replacing) employer plans. And seeing their employees accumulate and appreciate workplace savings would make more employers receptive to adopting a 401(k), SIMPLE IRA, or other plan.
How has the auto-IRA proposal been received?
The auto-IRA, developed on a bipartisan, trans-ideological basis, was co-sponsored in Congress by Republicans and Democrats, supported in 2008 by both presidential candidates Barak Obama and John McCain, and endorsed in New York Times editorials and in articles in the conservative National Review and Washington Times. It promised to move the nation far closer to universal retirement savings coverage — covering an estimated 30 million to 40 million additional workers in private-sector, tax-favored individual accounts owned by individual savers.
But after efforts to achieve bipartisan health reform resulted in Congress' enactment of the Affordable Care Act on a party-line vote in 2010, the political atmosphere turned bitterly partisan, and the auto-IRA proposal lost its bipartisan co-sponsorship in Congress, at least for the time being. Eventually, though, increasing numbers of states have begun adopting the auto-IRA proposal in the form of state-facilitated auto-IRAs (similar in some ways to the existing model of state-based 529 college savings plans).
As Congress has failed to enact a uniform, nationwide solution, California, Connecticut, Illinois, Maryland and Oregon have enacted a state-based version of the federal auto-IRA. Over 20 other states are considering similar bills.
Would more employer-sponsored ERISA-governed retirement plans be better? Absolutely. But for all our efforts, most small businesses still don't sponsor any.
We've also tried an optional approach to payroll-deduction IRAs for nearly two decades, making them available as an option to employers that choose not to sponsor a plan. Employers haven't responded. By all accounts, hardly any payroll-deduction IRAs have been adopted, and we know of none using auto-enrollment. Yet payroll-deduction IRAs are far less effective without auto-enrollment — which can be and is provided for under state-facilitated auto-IRA legislation.
Would the single, uniform, federal auto-IRA solution be more efficient than multiple, state-sponsored auto-IRA programs? Yes. But as long as Congress doesn't act, states are leading the way. Auto-IRA legislation in a growing number of states may be what it takes to finally win the support of a hesitant financial services industry — some members of which already recognize the long-term benefits (to them and to the nation) of tens of millions of new savers and ultimately trillions in additional assets under management — and spur congressional action.
Meanwhile, the very similar state auto-IRA programs enacted in five states so far would cover an estimated 10.4 million workers. But the sooner Congress enacts auto-IRA, the sooner states will stop adopting new auto-IRA programs, and the sooner existing state programs can be coordinated with or subsumed under the uniform federal umbrella legislation.
Yes, some states and localities have failed to responsibly fund their pensions for their own public employees. But in this context, that is a red herring.
Not only do many states have solid, adequately funded defined-benefit pensions for public employees, but, like the states' individual account plans for public employees and their 529 college savings plans for private citizens, state laws can and do provide alternative protections for auto-IRAs. Auto-IRAs are relatively simple and transparent, and fully funded by employees' contributions without risk of underfunding or forfeiture of nonvested benefits. And so long as most small employers decline to sponsor ERISA plans (in part because of ERISA's compliance responsibilities), without auto-IRAs their employees will have no retirement benefits or savings to protect.
Once tens of millions of additional employees and their employers first experience the benefits of tax-favored workplace saving through auto-IRAs, many more employees are likely to demand the more generous ERISA plans, including employer-matching contributions, and more employers should then be willing to step up and sponsor them.
In fact, once a state program is launched, it should boost 401(k) plan formation, as providers market 401(k)s to smaller employers, some of which will be more open to 401(k)s or SIMPLE IRAs as alternatives to payroll deduction IRAs.
The House of Representatives has passed, and the Senate is considering, resolutions under the Congressional Review Act disapproving the Department of Labor's 2016 final safe harbor rule confirming DOL's view that state-facilitated auto-IRA programs are not preempted by ERISA. This is based on DOL's view that state-facilitated auto-IRAs are not ERISA pension plans if the employer is required by state law to offer them and is not otherwise too involved.
Congress should refrain from intervening under the CRA. But even if Congress disapproves DOL's 2016 safe harbor rule under the CRA, the final say on these ERISA issues rests with the federal courts if they choose to address them.
Those rules, deregulatory in nature, make it easier for states and localities to exercise their rights to promote retirement savings for their citizens through use of personal accounts invested in the private sector that ultimately relieve pressure from taxpayer-funded public assistance programs. And these programs will help promote growth in our economy and retirement security for working families.
J. Mark Iwry is a former senior adviser to the Secretary of the Treasury and the deputy assistant secretary for retirement and health policy at the U.S. Treasury Department during the Obama administration.