Advisers, new pensions have holes to fill

More 40 years after the passage of the Employee Retirement Income Security Act, which improved the security of the pension promises made to millions of workers, the government is finally paying attention to the huge gap in ERISA – those who have no access to a pension plan.

ERISA did nothing to encourage small and medium-sized companies to start retirement plans for their employees. In fact, its administrative burdens and legal exposures actively discouraged new plans.

At present, one in three workers has no access to an employer-sponsored retirement savings plan, and most fail to take advantage of individual retirement accounts.

Federal and state governments are proposing or taking actions that would make it easier for employees not covered by employer retirement plans to save for their retirement. Some of the proposals smooth the way for small employers to start defined contribution plans, such as 401(k)s, by lessening administrative burdens.

While many of these steps would provide little immediate benefit for the financial services industry, it should still examine the proposals and support those that promise the greatest payoff in the most cost-efficient manner for the generally low- and middle-income employees who lack retirement plan coverage.

The payoff will be a healthier economy in the longer term as the programs increase the nation’s saving rate, providing money for corporate investment and ultimately, increased retirement income, easing the strain on government social services.

President Obama is expected to provide details of new initiatives in his 2017 budget proposals to be released Tuesday. The proposals reportedly will include requiring every em-ployer not currently offering a pension or retirement savings plan to set up an auto-enrollment individual retirement account for each worker.

AN EASIER WAY

The proposals reportedly will also triple the startup tax credit that employers receive to offset the costs of setting up retirement plans and make it easier for them to join multiple-employer plans by relaxing some of the existing requirements. They also will make it easier for employees to roll their retirement assets from one employer to another.

Meanwhile, Sen. Jeff Merkley (D-Oregon) has introduced a bill that would establish a new universal savings account — called the American Savings Account — that would give every worker not covered by an employer-sponsored retirement plan a simple way to save for retirement.

The bill would require employers without retirement plans to automatically put 3% of each employee’s earnings into an American Savings Account, which will have the same investment options as the Federal Thrift Savings Plan for federal workers, which is managed by BlackRock Inc.

The contributions would be forwarded to the government along with income tax withholding each pay period. Workers would control their own accounts directly through a website. The contributions and investment earnings would be tax-exempt until withdrawal.

These initiatives follow on efforts by a number of states to set up programs to allow private-sector workers without retirement plan coverage to save for retirement through state-run retirement systems, taking advantage of the investment and administrative infrastructure to keep costs down.

While these initiatives would address the costs and complications of expanding retirement plan availability for non-covered employees, there are still two holes that advisers might be able to fill: selling the idea of saving for retirement and providing advice on retirement investments.

Someone has to explain to these workers the importance of retirement saving, and the fact that they do not initially pay income tax on any money put into the retirement savings programs, which reduces the effective cost of those contributions.

And someone has to guide employees to the appropriate investments, depending on their age and how close they are to retirement. Employers might be persuaded to hire advisers to provide that advice.

While these initiatives come too late for many of baby boomers — those now between 51 and 70 — they could make a significant difference in the retirement well-being of their children.