What was old was new again in the Senate Thursday, when Sen. Tom Harkin (D-Iowa) introduced a bill to establish a privately run retirement plan that combines professional asset management and lifetime income benefits.
Mr. Harkin, chairman of the Senate Health, Education, Labor and Pensions Committee, pitched his Universal, Secure and Adaptable Retirement Funds Act of 2014 in hopes of closing the $6.6 trillion retirement income deficit. If the concept sounds familiar, that's probably because Mr. Harkin proposed the idea in July 2012, along with a report that examined the retirement crisis in the U.S.
The USA Retirement Funds would be available to everyone, automatically enrolling workers at a contribution rate of 6% per year — a rate that employees can choose to raise, cut or cease altogether. The assets themselves would be pooled and managed professionally by private investment firms that are selected by a board of trustees. Each fund would have to be cleared by the Labor Department and have a board of independent trustees to protect the interests of workers, retirees and employers.
Participants would benefit from the pooling of assets in a number of ways. For one, the large pools of assets will lead to lower investment fees. Further, workers can receive lifetime payments, including survivor benefits and spousal protections, thanks to the mortality pooling from all of the participants in the USA Retirement Funds.
The USA Retirement Funds are not intended to replace 401(k)s or pension plans. Rather, USA Retirement Funds would supplement those plans, Mr. Harkin said Thursday at a press conference in Washington.
“A 401(k) is a savings program — that's fine, but don't confuse it with a retirement program,” he said, adding “there is no way to convert that savings into a stream of retirement income that people can't outlive.”
There also would be tax benefits for saving in the retirement fund: Workers could chip in up to $10,000 before taxes, and employers can get a tax benefit for contributing up to $5,000 per year for each employee. Low-income employees would be eligible for a refundable savers' credit.
Employees can change their USA Retirement Funds annually, and they can roll their 401(k) and IRA balances into the fund. If a saver is under 60 and has a small balance, he or she can roll it into another retirement plan. Meanwhile, those who are over 60 can opt to take a one-time lump sum withdrawal of $10,000, or 50% of the benefit — provided they have sufficient retirement income outside of the fund or they're facing financial hardship.
Mr. Harkin's proposal is separate from President Barack Obama's MyRA proposal — a retirement account that would invest in government bonds and that can be opened with as little as $25, funded with payroll deductions as low as $5. Once a MyRA account hits $15,000 — or after 30 years — it has to be rolled over into a private sector
Roth IRA.
“I'm all for savings, but you need that retirement system,” Mr. Harkin said. “That's the leg of the [three-legged retirement income] stool we're focusing on. People need something that will be there when they retire, and they won't outlive it.”
