Rewriting retirement readiness: Will the USA Retirement Funds Act amend your plan?

During the State of the Union address on January 28, President Obama announced his directive to create “My Retirement Account” (MyRA), a personal savings vehicle. On January 29, Senators Susan Collins and Bill Nelson introduced the Retirement Security Act of 2014, which includes moderate changes to the existing legislative framework for employer-sponsored plans to entice more small employers to sponsor plans. On January 30, Senator Tom Harkin, chair of the Senate Health, Education, Labor, and Pensions Committee, unveiled the Universal, Secure, and Adaptable (USA) Retirement Funds Act. This act would provide for the creation of a kind of “super” multiple-employer plan and would ensure that almost every worker is covered by a retirement plan with both automatic enrollment and annuitized distribution features.

MyRA provides for a supplement to the current retirement system; the Retirement Security Act would modify it; the USA Retirement Funds Act would profoundly alter it. How?

The USA Retirement Funds Act would have a significant impact because all employers with 10 or more employees would be required to offer a retirement plan with automatic enrollment and a lifetime income option. If Milliman’s recordkeeping clients can be used as a representative sample, a quick look would tell us that only 2% of plans currently offer both features, which indicates the substantial majority of plans would be required to be amended if this core provision is enacted.

It’s possible that some employers would choose to terminate their current plans and participate in a USA Retirement Fund rather than amend their current plans. Though automatic enrollment has been gaining popularity since the Pension Protection Act (PPA) codified it in 2006, with approximately 40% of plans now offering it, plans that have not yet adopted automatic enrollment tend to have good reasons for not doing so—participant populations with especially high turnover, for example. Annuitized payment options, however, have been declining. According to one recent survey, only 6% of plans offer a lifetime income distribution option. Of this group, 82% report that less than 5% of participants elect it.

The USA Retirement Funds Act could indeed dramatically alter retirement preparedness statistics: requiring a retirement plan for companies with 10 or more employees would allow access to a workplace retirement plan for many American workers who currently don’t have one; automatic enrollment for all plans would increase the number of people saving for retirement; and requiring annuitized distribution options would reduce the risk of people outliving their savings.

Senator Harkin has designed some intriguing new tires to get Americans moving toward retirement readiness … but will the rubber hit the road? If it does, plan sponsors would be advised to make sure their ERISA attorney is along for the ride.

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