Ideas for 401(k) Have-Nots
For the past few years attention has focused on making 401(k) and other retirement plans work better for those who have access to them. And the improvements have been considerable. The move to automatic enrollment and default investments that provide better returns increases the likelihood that more workers will reach retirement with a bigger stockpile of savings.
But what about the roughly 75 million workers who don't have access to workplace retirement savings plans? They tend to be younger and to have low to moderate incomes. And many of them work part time or for small businesses or are self-employed. Although opening an individual retirement account is an alternative, it can be tough to do if you're just scraping by and your employer doesn't have a system set up to encourage you to save through payroll deduction, automatic enrollment and matching money.
This lack of coverage is a serious problem and, I must confess, not just a theoretical concern for me. It's as real as my daughter Alec (aka Sarah), who has spent the past two years working almost seven days a week, rebuilding her Hurricane Katrina-damaged house in New Orleans. She's done wiring, welding, sheetrocking, plumbing and almost everything else. She took a three-month break living in Ciudad Chihuahua in Mexico and writing a novel, and occasionally she works for pay. She purchased the house eight months before Katrina hit and pays her mortgage with rent from her housemates. Fortunately, she knows how to stretch a dollar: Her beautiful garden is full of plants that she has salvaged from curbs where they were left for trash collection by landscapers or homeowners, and she gets around on bikes that she builds at the Bike Project.
At 31, my daughter is wonderful and amazing. She works extraordinarily hard, but the jobs that she's had aren't the kind that have retirement plans. Most recently she's been doing "deconstruction" with the Green Project, helping take apart houses by hand so that building materials can be reused instead of being scraped into a landfill by a bulldozer.
As a result, like many other hard-working folks out there, she doesn't have a dime set aside for retirement.
Happily, there are ideas percolating that would make it easier for those who don't have access to retirement savings plans to put aside money. Some of the plans are even bubbling up in the presidential campaigns. Several groups have come up with proposals for how to make such a system work. Many of the ideas share features. It's possible this could be the next legislative frontier for improving defined contribution plans such as the 401(k).
Several proposals would create savings plans that are not run by employers, but for which employers provide payroll deductions. The Conversation on Coverage, a six-year effort by an array of retirement experts, came up with something called the Retirement Investment Account. The RIA would be administered by a government-sponsored central clearinghouse that would contract with the private sector to invest employee contributions.
"One reason we focused on that was that we thought that having a single place where employers deposit the money would make it easier on employers, rather than having to select a vendor," said John Kimpel, former senior vice president and deputy general counsel of Fidelity Investments. Employees would have up to four investment choices, with the default being a combination of stocks and more conservative investments, such as a lifecycle fund.
The Retirement Security Project went in a slightly different direction. A proposal for Automatic IRAs by J. Mark Iwry of the Brookings Institution and David C. John of the Heritage Foundation envisions the payroll deductions but no central clearinghouse. Instead employees might choose their IRAs from a mutual fund or bank and have their money sent there. Or an industry consortium or nonprofit organization might create a standard IRA account -- with limited investment options and low costs -- in which employees could participate. Workers who are self-employed might be able to participate through automatic debit arrangements created by trade or professional associations.
Iwry and John say that their plan is carefully designed so that it wouldn't discourage employers from setting up a traditional 401(k). For one thing, the annual maximum contribution level for IRAs is $4,000. As they noted in one of their summaries, "This is sufficient to meet the demand for saving by millions of households but not high enough to satisfy the appetite for tax-favored saving of business owners or decision-makers, who can contribute up to $15,500 to a 401(k) (or $20,500 if they are age 50 or older)."
So far, this proposal seems to have the most traction. Legislation based on the proposal has been introduced by Senate Finance and House Ways and Means committee members.
One feature that several proposals share is changing the Savers Tax Credit to make it refundable. Currently the Savers Tax Credit provides a nonrefundable credit of up to $1,000 or up to $2,000 for married couples for contributions to an employer plan or IRA, which is only valuable if you have a tax obligation. If the credit were made refundable and added to the retirement savings account, it would be another incentive to save and would help the account grow in the same way that employer matching funds do.