It is late on a Saturday night so I will keep this short. I must admit to being puzzled by Sen. John Hickenlooper's (D-Colorado) proposal to replace or reduce the US 401k plan in order to fund his proposed "Retirement Savings for Americans Act" (RSAA). Here is a summary of the RSAA as I think I understand it (with a hat tip to NAPA):
Eligibility and Auto Enrollment: Full- and part-time workers who lack access to an employer-sponsored retirement plan would be eligible for an account and automatically enrolled at 3% of their income. They could choose to increase or decrease their withholding or opt-out entirely at any time. Independent workers (including gig workers) would also be eligible.
Federal Contribution: Low- and moderate-income workers would be eligible for a 1% automatic contribution (as long as they remain employed) and up to a 4% matching contribution via a refundable federal tax credit. This would begin to phase out at median income.
Portability: Accounts would remain attached to workers throughout their lifetimes, and workers would be able to stop and start contributions at will.
Private Assets: The accounts would be the worker’s property, and the assets could be passed down to future generations to help them build wealth and financial security.
Investment Options: Much like the current Thrift Savings Plan, participants would be given a menu of simple, low-fee investment options to choose from, including lifecycle funds tied to a worker’s estimated retirement date or index funds made of stocks and bonds.
Here are a few of my questions:
If a 401k plan has an eligibility period, say of one year, is the employee allowed to enroll in the government plan during that one year of ineligibility?
How would having employees in two plans impact annual ADP/ ACP testing?
What is the definition of low and moderate-income? Does this vary by state? Low-income in San Francisco could mean "doing quite well" if that same salary is in other parts of the US.
Isn't a refundable tax credit likely to be spent whereas a match can't generally be taken out before 59.5 years old?
It sounds like there is no vesting in this proposed Federal plan? What happens if the employee becomes eligible in the employer's plan and there is vesting?
It seems that the investment options are not ESG focused. This will rub some folks the wrong way from a risk-return point of view.
Continuing on the investment front, which investment company stands to benefit from the low-fee index offerings given the potential demand for this plan?
From what I can see, the Federal plan would not provide access to financial advisors. I would like to think my industry peers and I add some sort of value to our clients.
And yes, in keeping the American Retirement Association's comments, wouldn't employers happily terminate their private 401k plans and just let the government handle it? Doesn't seem really competitive, no?
There is a long road to get from proposing something in a bill and the bill coming law. And what sounds good on paper may not work out. Does anyone else remember the Lifetime Savings Account proposal? Can't say I am a fan of this proposal. How say you, my audience?