Hidden in the “Build Back Better” Budget Reconciliation Bill is a section that could change the whole retirement system in the U.S.
A retirement plan must be offered by employers with five or more employees and employers must enroll their employees automatically, contributing 6% of their earnings to retirement accounts. In year five, the automatic contribution would increase to 10% of pay. You would invest in a Roth IRA in a target-date fund, a mix of investments based on when you expect to retire.
As part of the proposed legislation, employers need to comply. The plans would have to be offered. Employees, however, would be able to opt-out of the program. Nothing would change if an employer already provides a 401(k) or similar plan; the proposal is for small employers without 401(k) plans.
In some ways, this resembles autoenrollment plans in Oregon, California, Illinois, and elsewhere. Employees in Oregon, for example, are automatically enrolled in a state-managed individual retirement account (IRA), with contributions starting at 5% and increasing to 10%. Still, employees can adjust their contributions or decline to contribute.
The two are, however, fundamentally different. First, employers would be required to select an IRA to enroll their employees instead of simply forwarding payroll deductions. There seems to be a list of approved providers from which they can choose. Secondly, the various state programs have had extended phase-ins; Employers with five or more employees must comply with the federal mandate from day one, and no analysis has been done of how small employers would accommodate this requirement. In addition, the program requires employers to choose, for retirement, only those IRAs that can be converted into annuities.
Additionally, workers continue to be “nudged” into 10% contributions without any useful guidance as to what is the right level of saving based on their circumstances; due to the progressive nature of Social Security benefits, which replace a larger percentage of income for lower-earners than for middle- or upper-earners, no one size fits all approach works, and some lower-earners may be better off without any savings. There is also little information about what happens to paycheck-to-paycheck workers when they are placed in these programs. Will they opt out, reduce their spending, or go into debt?
Possibly the most troubling aspect of this proposal is that it is included in the Reconciliation bill, disguised as a tax because the fine that employers will pay, $10 per employee per day, for not complying with the requirements, is listed as a tax to comply with the requirements of a Reconciliation bill. In the absence of public discussion about the plan’s design and financing (or lack thereof), the “Build Back Better” Budget Reconciliation Bill should not be passed, catching people by surprise.
For employers and employees, this is a profound change. The bill needs to address the uncertainty regarding whether IRA providers will develop low-effort ways for employers to select their offerings and whether the Automatic IRA Advisory Group will perform well. Additionally, the government will develop compliance methods that do not burden employers. A mandatory retirement program would be better implemented alongside broader Social Security reforms. Putting it into a massive spending program is another example of Congress’s failure as a governing body.