401(k) Legislation - The Good, The Bad, and The Ugly

Over the past several years Congress has been floating different versions of legislation all aimed at improving the retirement prospects of the American workforce. While not nearly as entertaining as re-watching one of the greatest western movies of all time, the industry is tuning in to see politicians try to convince us which of their plans will reveal the hidden bags of gold.  

Three bills have been introduced, and you can decide for yourself who to cast as Blondie, Tuco, and Angel Eyes, but for my money, only one would be worth passing.

THE GOOD

Advancing Auto-Portability Act of 2022

There was a time when people only worked for one or two different employers their entire working life, and a common benefit in those days was a pension. Today, according to the Bureau of Labor Statistics report published in 2021, a person who starts working at age 18, will on average, have 12 different jobs by the age of 55, and pensions are, for the most part, a thing of the past. 

The 401(k) is now the most common retirement plan for employees, and because people work for so many different employers today, they end up participating in many different plans. If you have ever changed jobs and tried to move your 401(k) balance then you understand the difficulty this presents. Also, frequent job changes can create what is called 401(k) "leakage", meaning that people are more likely to cash out, especially if they have small balances. 

The Advancing Auto Portability Act provides support for the implementation of auto portability and the creation of an industry-wide auto portability network. Imagine being able to change jobs and your 401(k) balance automatically transfers to your new employer by way of the retirement plan network.  

This legislation could help preserve savings in 401(k) plans by reducing cash-outs (people with pensions don't take out money) and increasing participants in employer-sponsored plans.

Furthermore, it is what participants want. In an employee benefits survey, 9 out of 10 people said that automatic transfers would be valuable to them. They also favored auto-portability over consolidating to an IRA or leaving the money at their former employer. 

Passing this bill could go a long way to keeping a person's 401(k) savings intact until retirement. 

THE BAD

RISE & SHINE Act

RISE & SHINE stands for “Retirement Improvement and Savings Enhancement to Supplement Healthy Investments for the Nest Egg” and, get this, it was advanced by the Senate HELP (Health, Education, Labor, and Pensions) committee. The acronym gymnastics alone should tell you they likely spent more time coming up with a name to hang their hats on than actually trying to solve the retirement crisis. 

What makes this Act bad is that it is entirely too complicated, focusing on additional provisions around multiple employer plans (MEPs), pooled employer plans (PEPs), notice requirements, and 5500 group filing requirements. The small business owners I know do not want to join MEPs or PEPs, and I have my doubts that the technical language in this bill will do much to help middle America save more for retirement. 

Another problem is that the bill removes some of the more redeeming qualities that the House has already passed with SECURE Act 2.0.

For example, RISE & SHINE does NOT include:

• the credit enhancement for small employer retirement plan startup costs;
• the increase to the Saver’s Credit by simplifying the credit rate; 
• increasing the catch-up contribution limit for those ages 62–64; 
• treating student loan payments as elective deferrals for purposes of matching contributions; 
• removing required minimum distribution barriers for life annuities; and 
• implementing a retirement savings lost and found database. 

Lastly, Senators are, as usual, starting to weigh the bill down with all kinds of amendments that may be hard to reconcile as the bill works its way through congress. 

THE UGLY

The Starter-K Act

There are probably several ideas floating around the Washington D.C. area that would qualify for this category, but the winner in my view is the "bipartisan" Starter-K Act. Introduced by a Democrat Linda Sanchez from California and Republican Darin LaHood of Illinois, the Act would ease the implementation of start-up plans, "resulting in more access to, and coverage for, retirement savings."

They argue that the reason people struggle planning for retirement is that small businesses do not provide retirement plans. 

Sanchez said, “Small businesses fuel our economy and allow our communities to thrive, unfortunately, the hard-working Americans who keep our small businesses running are often left with few options to save for retirement. This legislation will help small business owners provide their employees with streamlined, cost-effective retirement plans, ensuring more Americans can retire with financial peace of mind.” 

LaHood continued, “In Illinois and throughout America, small businesses are the biggest employers, and they should be able to provide their workers with better options to save for retirement. Our bipartisan legislation will remove unnecessary, complex regulations to allow more small businesses to offer retirement plans and help more Americans secure their financial future.” 

I may be reading into what they are saying, but it sounds to me like they are blaming small business owners for limiting their employee's ability to save. That is nonsense. Everyone already has access to an IRA or Roth. It is not about ACCESS, it is about SAVING.

There is absolutely no reason for this legislation. It just puts more burden on small business owners. We need to stop telling people that retirement is created by government programs or employer plans.

In my opinion, no employer should have a plan unless they provide some sort of match. The only thing that helps is matching not mandates. It is really quite simple, stay out of debt and save, save, save. That is how you create a financially secure retirement.