Hidden in the Reconciliation Bill: a Retirement Plan Mandate That Will Take Most People by Surprise
3rd October 2021
“Under the proposal, starting in 2023, employers with five or more employees would have to offer a retirement plan and automatically enroll employees, diverting 6% of their pay to a retirement account. An automatic escalation clause would increase the automatic contribution to 10% of pay by year five. The default plan would be a Roth IRA invested in a target-date fund, a mix of investments based on your expected retirement year.
“For employers, it’s a mandate. They would have to offer the plans. Employees would be able to opt out.”
…
In the first place, under the new federal mandate, employers would be obliged to select a specific IRA in which to enroll their employees, rather than merely forwarding payroll deductions to the state. It appears that they would choose from a list of approved providers. Second, the various state programs have had extended phase-ins; the federal mandate applies to all employers with 5 or more employees from day one, and there appears to be no analysis of how it would be for these small employers to do so. Third, the program requires employers must choose, not just any IRA, but only those in which there is an option to convert the account balance into an annuity at retirement.
It also continues to be the case that workers are being “nudged” into 10%-of-pay contributions without any useful guidance as to what the right saving level is for their personal circumstances; given the progressive level of Social Security benefits, which replace a far greater percentage of pay for lower-earners than middle- or upper-earners, there is no one-size-fits-all answer here, and, indeed, some lower-earners may be better off with no savings at all.