President Obama planned to announce several initiatives at his State of the Union on Tuesday night that, according to the White House, will give 30 million more workers a way to save for retirement through their employers.
The president’s proposals would be funded by closing retirement tax loopholes for the wealthy.
“Americans face a daunting array of choices when it comes to retirement savings. While some workers are automatically enrolled in a retirement savings plan by their employer (with an option to opt out), others have to open an account, manage contributions, and research and select investments on their own,” the administration said in a fact sheet released in advance of the president’s speech.
“Meanwhile, tax loopholes have allowed some high-income Americans to accumulate tens of millions of dollars in tax-preferred accounts that were intended to help workers save for a secure retirement, not to provide tax shelters for the wealthiest few.”
Under Obama’s proposals:
- Every employer with more than 10 employees that does not offer a retirement plan would be required to automatically enroll their workers in an IRA. Auto-IRAs would let workers opt out of saving, if they choose.
- Any employer with 100 or fewer employees who offers an auto-IRA would get a $3,000 tax credit. The president also will propose to triple the existing “start-up” credit, so small employers who newly offer a retirement plan would receive a $4,500 tax credit to help them offset administrative expenses. Small employers who already offer a plan and add auto-enrollment would get an additional $1,500 tax credit.
- Access to retirement plans would be extended to part-time workers. This would happen by requiring employers who offer plans to permit employees who have worked for them for at least 500 hours per year for three years or more to make voluntary contributions to the plan. Employers now are allowed to exclude employees who work less than 1,000 hours per year.
- Contributions to tax-preferred retirement plans and IRAs would be capped once balances are about $3.4 million, enough to provide an annual income of $210,000 in retirement.
Along those lines, the Investment Co. Institute on Tuesday released a survey that found a strong majority of households — including those with and those without retirement plan accounts — disagree with proposals to remove or reduce tax incentives for retirement saving in defined contribution accounts.
The American Benefits Council said the president’s proposal send a mixed message.
“Retirement savings policy need not be a ‘zero sum game.’ Restricting savings for some workers does not help others achieve retirement security,” said ABC President Jim Klein.
The ABC, echoing the concerns of others in the retirement industry, takes issue with Obama’s proposed contribution cap, saying that once interest rates rise, it would impact far more than the handful of high-income Americans with outsized IRA account balances. The cap, according to the White House, would provide an annual income of $210,000 in retirement.
“Portraying the president’s proposal as limiting retirement plan balances to ‘about $3.4 million’ is very misleading,” Klein said. “In fact, the proposal limits annual benefits that can be paid at age 62. In today’s extremely low interest rate environment, that equates to about $3.4 million. But given historical interest rates the government uses for pension calculations, the allowable account balance for a 35-year-old worker would be about $300,000.”
That said, the ABC commended Obama for trying to find ways to make it easier for smaller employers to expand access to retirement plans.