Overview

Many Americans do not save enough for retirement, and the Retirement Savings for Americans Act aims to address this issue. However, the act may create new problems, overlook critical questions, and potentially harm the investment sector. The government already has an existing retirement program that requires attention. The act's specific investment options could limit competition in the investment sector. Furthermore, if business owners are not incentivized to provide robust retirement plans to their employees, some industries may avoid investing in their employees due to this government program.

The State of America’s Retirement Savings

I recently wrote an article that highlights alarming statistics about the average American's retirement. Here are some of the key findings.

• 43% of Americans do not feel confident about their chances of a comfortable retirement. 

• Over 73% of Americans have access to a retirement plan. However, only 56% participate in their employer's retirement plan (Bureau of Labor Statistics, 2023). 

• 71% of employees with access to a retirement plan join if there is automatic enrollment, and 29% participate on average if their retirement plan does not (Bureau of Labor Statistics, n.d.).

By observing these statistics, we can see that many Americans have access to retirement plans. Even if they did not have access to retirement plans through their employer, they could access individual retirement accounts (IRAs) if they had earned income. As we can see from the statistics of those who automatically enroll in these plans versus those who must take the initiative to get started in a plan, there is a stark difference between the two.

One of the provisions of Secure Act 2.0 is that new employer-sponsored retirement plans must add an automatic enrollment provision to their plan. Though I am a fan of giving employers a choice in their retirement plan design, the automatic enrollment provision requirement will likely help increase overall retirement plan contributions here in the United States.

The Retirement Savings for Americans Act

The Retirement Savings for Americans Act was introduced to address the issue of Americans not saving enough for retirement. While the premise of the act is based on legitimate concerns, the proposed method to address it is ineffective and will create other problems. I agree that a problem needs to be resolved, but I disagree with the approach suggested by the bill's sponsors. Lawmakers must understand the gravity of this problem and develop an effective solution that can help improve retirement preparedness in the United States. 

Critical Components of the legislation

Before we get into some of the key reasons why this bill is a bad idea, let's talk about some of the bill's main points. Here are a few key components directly from the bill.

Eligibility and Auto Enrollment

Workers who do not have employer-sponsored retirement plans would be eligible to set up this account with a 3% automatic enrollment of their income.

Federal Contribution

Low-income earners would be eligible for a 1% automatic contribution and up to a 4% matching contribution through a federal tax credit. It would phase out depending on the income of the individual.

Portability

Just like existing retirement plans, employees would be able to start and stop contributions and could keep the retirement plan throughout their life.

Private Assets

Participants of these plans would own their assets and could pass the money down to other generations as desired.

Investment Options

Participants would receive a simple menu of low-fee investment options to choose from.

Social Security

Many Americans are concerned about the depletion of Social Security. The 2022 Social Security trustees report warns that in 2034, retirees will start receiving reduced benefits if Congress doesn't act to fix the program (CNBC, 2023). It doesn't make sense to add new programs without patching the holes in the existing programs taxpayers are already paying into.

Currently, employees and employers are each paying 6.2% for a total of 12.4% into Social Security funds to receive a benefit in the future. This means that every employee and employer is already contributing a substantial portion of revenue to a program that is failing or heading toward depletion if nothing changes.

It's clear to the average American that Social Security appears to be a sinking ship they are paying into with no prospects of it being repaired. Passing the proposed bill would be like building and paying for a new ship that only allows some to board (Retirement Savings for Americans Act) while continuing to pay for a sinking ship (Social Security) with no plans or prospects of being repaired.

The United States is already struggling to balance its budget. Adding another retirement program doesn't make sense when we have a failing program with no apparent repair plans. 

Fund Selection

A primary concern regarding this program is how the utilized funds are chosen. The fund providers listed for selection could enjoy a significant advantage over their competitors by being included in this program. This move could decrease the competitive landscape. 

Competition is the driving force behind much of what we have built in the United States. One of the benefits of an employer-sponsored retirement plan is that investments can be added or removed based on fees, performance, and other financial factors. Therefore, each fund company is encouraged to compete and provide the best fit for retirement plans.

If certain fund families are given preferential treatment without a clear outline of how these funds are selected and without the ability for fund providers to be removed if they don't meet specific metrics, it could be considered an anti-competitive practice. 

The bill includes a provision that encourages using low-fee funds, such as index funds. As someone who supports using low-fee funds, I believe this provision may discourage providers from creating actively managed funds due to the reduced incentive.

The bill's impact on this market's competitiveness will depend heavily on how widely it is adopted if it becomes law. It will also depend on the metrics used to pick the funds chosen to be available in the program.

The Industry Impacts

The proposed bill could bring about significant changes in the retirement plan industry. If the government decides to subsidize employee contributions through this program, many employers may opt not to offer private retirement plans. Although some corporations may continue to provide 401(k) plans to differentiate themselves from their competitors, the availability of a government program like this may lead to fewer employers offering private retirement benefits to their employees.

Furthermore, this bill could discourage some industries from providing retirement benefits to their employees through a private program altogether. This is a valid concern since the benefit is based on the employee's income. Therefore, industries with lower income earners may be more inclined to adopt these programs, while sectors with primarily higher income earners would not be eligible for such programs. This could lead to higher-income industries offering more robust private programs and lower-income industries relying on a public program due to the higher-income industries' lack of workers who qualify for such programs.

Although high-income industries may already offer more robust retirement plan programs, it is possible that this bill may not have a positive impact if some sectors are not motivated to provide better retirement plans. 

A more effective approach would be providing employers with more incentives to create private programs and improve their retirement plans. This would increase competition and motivate employers to offer better retirement plans rather than relying on the government to make a difference.

Conclusion

Many Americans are not saving enough for retirement despite having access to employer-sponsored retirement plans. The Retirement Savings for Americans Act aims to address this issue but may overlook some critical questions and create new problems. The government is already struggling to pay its bills and has an existing retirement program that requires attention, so adding another program that requires additional funds may not be the best idea.

Furthermore, singling out specific investments that will be available in this program could limit competition in the investment sector and potentially harm the actively managed market. If business owners are not incentivized to provide robust retirement plans to their employees, some industries may avoid investing in their employees because of the already available government program.

We would love to earn your business if you are looking for a Utah 401(k) advisor. Please contact our team to learn how one of our wealth advisors, based in Salt Lake City, Utah, can help. Though we are based in Utah, we serve plans in many states.

Bibliography

YouGov. (2023, November 30th). How much does the average American have in retirement savings? Retrieved from business.yougov.com: https://business.yougov.com/content/48009-how-much-does-the-average-american-have-in-retirement-savings

CNBC. (2023, July 30). Will Social Security run out of money? Here’s what could happen to your benefits if Congress doesn’t act. Retrieved from cnbc.com: https://www.cnbc.com/select/will-social-security-run-out-heres-what-you-need-to-know/

Bureau of Labor Statistics. (2023, September 29). TED: The Economics Daily image. Retrieved from www.bls.gov/: https://www.bls.gov/opub/ted/2023/73-percent-of-civilian-workers-had-access-to-retirement-benefits-in-2023.htm#:~:text=In%20March%202023%2C%2073%20percent,was%2077%20percent%20in%20March.

Bureau of Labor Statistics. (n.d.). Data Retrieval Tools. Retrieved from data.bls.gov: https://data.bls.gov/cgi-bin/dsrv