Working with the World Economic Forum, Mercer has estimated the long-term savings gap in the U.S. at $27.8 trillion at the end of 2015, and it says longer life spans will cause that number to grow significantly. In addition, widespread lack of financial knowledge—coupled with a continued inability to save and limited access to workplace plans or other effective savings vehicles—could cause the gap to reach $137 trillion by 2050.
In a point-of-view white paper, Mercer offers several specific policy recommendations to address what should be done now to enable more Americans to retire with confidence:
- Support retirement security through tax policy;
- Improve access to retirement plans for more Americans facilitated through the workplace;
- Build on the success of the private retirement system; and
- Remove impediments to employers maintaining defined benefit (DB) plans.
Mercer contends that strong participation rates in 401(k) plans show they are an effective means to encourage savings. It urges policymakers not to exacerbate the already-significant savings gap in America and risk the progress employers have made in encouraging their employees to save by disrupting the current tax treatment of 401(k) contributions. The recently released tax reform bill indicates Congress is not considering doing so.
As Congress considers retirement issues, Mercer says it’s critical to focus on policies that will help expand plan coverage and help individuals and employers generate more savings and retirement income. The research says one of the most promising ways to address this challenge is to remove current barriers to creating “open” defined contribution (DC) multiple-employer plans (MEPs) by private-sector organizations. Open MEPs would be freed from the current requirement that participating employers have common ownership or a common business purpose.
Mercer notes that automatic payroll deduction IRA plans also hold promise as a way to expand plan coverage, and a number of states are moving to offer these arrangements to private-sector workers. However, it believes the potential patchwork of inconsistent state-run programs may create obstacles for employers with operations in more than one state. The white paper says employer-based plans offer significant advantages to IRAs in the form of substantially higher contribution limits, the possibility of employer matching contributions, generally lower costs and the Employee Retirement Income Security Act’s (ERISA)’s participant protections.Strengthening the current employer-based retirement plan system
To strengthen the current system of employer-based plans, Mercer suggests policymakers encourage greater access to lifetime income products. Mercer says a clear safe harbor from liability for selecting an annuity provider would facilitate this, as the current Department of Labor (DOL) guidance with respect to annuity selection from a DC plan is too vague to be helpful to plan sponsors. Facilitating the portability of lifetime income options, which will permit participants to preserve their lifetime income investments and avoid surrender charges and fees, would also be helpful.
Mercer also suggests an alternative automatic enrollment/escalation 401(k) safe harbor plan should be created with higher default deferral rates. Unlike the current automatic enrollment safe harbors, which require an initial participant deferral rate of 3%, the new safe harbor plan’s initial deferral rate should be 6% and escalate to 10% in subsequent years. The design would also allow employers to match employee contributions up to 10% of pay.
A not-for-profit industry clearinghouse, similar to the Depository Trust Clearinghouse Corporation, could facilitate the automated transfer of assets from plan to plan or from plans to individual accounts and vice-versa, Mercer says. This new clearinghouse would help reduce leakage associated with low-balance individuals cashing out their savings when changing jobs, would help individuals better consolidate and manage their retirement benefits, and would reduce instances of “lost benefits.”
The paper points out that short-term and emergency financial needs can cause individuals to tap their retirement accounts, incurring taxes and penalties. Mercer says some of this leakage could be prevented by allowing employers to automatically enroll workers in savings programs for both retirement and more immediate needs, such as paying off student loans or buying a home. In addition, for those currently enrolled, allowing them to continue contributing after they have made a hardship withdrawal would avoid further diminishing their savings. The current tax reform proposal includes a provision that would allow participants to continue contributing.
Finally, Mercer encourages policymakers to remove impediments to employers maintaining DB plans by taking Pension Benefit Guaranty Corporation (PBGC) premiums “off budget,” and by revising nondiscrimination testing rules for frozen DB plans. The Internal Revenue Service (IRS) has issued such nondiscrimination testing relief, and the current tax reform proposal would make this permanent.