Sen. Tom Harkin, D-Iowa, unveiled new legislation this week that would help tackle the retirement crisis in America and shore up the private pension system. Industry reaction to the bill was mixed; some cheered while others thought it too complex.
Called the Universal, Secure and Adaptable (USA) Retirement Funds Act of 2014, the legislation, if passed, would give the 75 million individuals in the country who don’t have access to a retirement plan at work a way to earn a safe, portable and secure pension benefit for life.
His legislation would create a new type of privately run retirement plan that combines the advantages of traditional pensions, including lifetime income benefits and pooled, professional management, with the portability and ease for employers of a 401(k).
“USA Retirement Funds would be 21st century retirement plans, run entirely by the private sector, that drastically reduce costs through professional management and risk sharing. Simply put, giving people without access to a quality employer-provided plan the opportunity to earn a retirement benefit would help ensure every American enjoys their golden years with the dignity and financial independence they deserve,” Harkin said in a statement.
The National Conference on Public Employee Retirement Systems, the largest trade association for public sector pension funds, said that it fully supports the Harkin legislation.
“We applaud Sen. Harkin for focusing national attention on America’s retirement security crisis and the vital role defined pension benefits must play if we are to effectively address that crisis. His bold proposal for establishing USA Retirement Funds would help restore defined benefit pensions to the private sector, which is facing a retirement savings deficit in the trillions of dollars,” NCPERS said in a statement. “His legislation would also make it far easier for private sector employers – especially small businesses – to offer retirement savings plans for their workers, since it would eliminate the investment risks and substantial administrative burdens involved with establishing those plans.
Others, however, like The Online 401(k), had problems with the bill, believing its approach wasn't simple enough.
Harkin’s bill is “one of the most complicated approaches I’ve ever seen,” said Chad Parks, founder and CEO of The Online 401(k). “The way they are approaching this is one of the more complicated. The point was to get more people to save, to increase savings rates. Basically they were trying to combine a defined benefit with a 401(k), with pooled investment risk, with annuitization pension-type payouts and with deferral limits relative with time to retirement.”
Parks pointed out that the investments would be pooled, not individually directed. They would go into a professionally managed portfolio and the cash flow in and out would be managed like a DB plan. They also would need to figure out who will draw out the money when and would have to calculate that on a plan basis.
Making it like a multiemployer plan adds another layer of complication, he said.
The legislation includes:
- Universal coverage: USA Retirement Funds would be available to everyone, including the self-employed and those who don’t have access to a retirement plan at work.
- Automatic enrollment: Employees would be auto enrolled at a deferral rate of 6 percent per year, but they could choose to raise, lower or stop their contributions at any time.
- Secure lifetime income: Benefits would be paid monthly for life and participants would be shielded from market volatility and other risks.
- Lower costs: Pooled assets, professional management and risk sharing will reduce the cost of retirement by up to 50 percent.
- Portability: People would be able to take their benefit with them as they change employers.
- Simple and easy for businesses: Small businesses can easily participate and would not have to take on risk or undue administrative burden.
The plan would utilize existing payroll withholding systems so it wouldn’t be an administrative burden on businesses. Self-employed people could set up an account through the program and make contributions as they would to an IRA.
USA Retirement Funds would be privately run retirement plans that are approved and overseen by the Department of Labor. Each fund would be managed and administered by a board of qualified trustees who would represent the interests of employees, retirees and employers. They would be fiduciaries and thus required to act prudently and in the best interests of plan participants and beneficiaries.
The legislation follows on the heels of President Obama’s State of the Union announcement that he has directed the Treasury department to form a new type of retirement plan, called the MyRA, that would be accessible to all Americans. The program also would be accessible through payroll deductions but would invest in secure government bonds. When the accounts reach $15,000, they will be rolled into Roth IRA accounts for the holders.