Saving for retirement — and understanding your benefits — could get a lot simpler soon.
Older people could contribute more to their retirement savings. Part-time workers could find it easier to build retirement accounts. Small businesses could get help offering employees retirement accounts.
Congress is moving in a deliberate, bipartisan fashion to craft legislation that would do all that and more.
The changes, which lawmakers aim to be in effect next year, “would have a range of positive impacts for workers across the country, some of which could be substantial,” said Katie Selenski, executive director of the CalSavers Retirement Savings Board.
In California, about 7.4 million private sector employees 25-64, or 61%, have not had access to an employer sponsored retirement plan, said a 2019 study by Nari Rhee, director of the Retirement Security Program at the University of California’s Center for Labor Research and Education.
Her research found that 54% of the state’s private sector employees did not have a retirement savings account or participate in a pension.
Rhee told The Sacramento Bee the House retirement reform legislation, which passed the House Ways and Means Committee on a voice vote last month, “tinkers around the edges of the retirement system and will thus have a modest impact on household retirement assets.”
The Senate is considering similar legislation with strong support from Democrats and Republicans.
All this is the latest installment of retirement reform that passed Congress easily in 2019, legislation that provided more incentives for employers to offer employees 401 (k) plans and other options.
David Certner, AARP legislative counsel, noted that while the changes would be important, they tend to be incremental, so it’s not as though people will see sudden, dramatic changes in how they save for retirement or receive benefits.
Making retirement savings simpler
Among the provisions of the House bill:
▪ Automatic enrollment. Most new employers would have to enroll employees if the 401 (k) or 403 (b) plans are new. Employees could opt out. Certain businesses would be exempt: those with 10 or fewer employees, those in business for less than three years, and church and governmental plans.
Employees would automatically contribute at least 3% of their income in the first year. The percentage would then grow in future years.
▪ Help for small businesses. The bill increases credits for small businesses starting retirement plans for employees from 50% to 100%. of administrative costs up to $5,000. Employers with up to 50 employees would be eligible. The bill also adds a credit for a small employer that makes contributions on behalf of employees to a retirement plan.
Selenski called the credits and automatic enrollment “two of the most significant provisions.”
Lynn Dudley, senior vice president, global retirement & compensation policy at the American Benefits Council, saw these features as having potential to “stimulate small businesses where there’s the weakest coverage. Small business is typically where you see that because it’s such a struggle to maintain a plan.”
Since July 2019, California has required private employers with more than five employees that do not offer a private retirement program to join CalSavers, which automatically enrolls employees in an Individual Retirement Account. The legislation would provide incentives to start new plans, and as a result could decrease the pool of employers joining CalSavers, Selenski said.
“That would be perfectly fine from our perspective, as we are mission driven to expand retirement security and we’re indifferent about whether that happens through CalSavers or through increased participation in private plans,” she said..
Help for older workers
▪ Higher ages for withdrawals. Currently, people must withdraw a certain percentage of their retirement plan starting in the year they turn 72. That age would change to 73 in 2022, 74 in 2029 and 75 in 2032.
Not all experts cheered this change.
Allowing older people to delay withdrawing money from their accounts “would have major consequences, some unintended. And it would not be cheap,” said Howard Gleckman, a senior fellow at the nonpartisan Tax Policy Center.
He argued that the new policy would benefit primarily wealthier retirees. Gleckman cited 2018 Internal Revenue Service data showing that about 17% of taxpayers with adjusted gross incomes of more than $100,000 took more than half of the $253 billion in IRA distributions, while those earning $50,000 or less took about 20%.
▪ Bigger contribution limits. When someone turns 50, they can increase their contributions to IRAs each year by $1,000. The bill would allow an inflationary increase to this additional contribution as well starting in 2023.
In addition, the overall catch-up limit, which allows people over 50 to contribute extra money to their retirement account, would also go up. The current annual limit is $6,500. The bill would increase it to $10,000 annually for most people 62, 63 and 64. The $10,000 limit could be adjusted for inflation.
“For middle and higher income households approaching retirement, the enhanced catch-up contributions will be helpful.” Rhee said.
Help for part-time workers
▪ Part-time workers. Companies offering a 401 (k) must now permit employees working at least 500 hours a year for three consecutive years to participate in the plan. The bill lowers the requirement to two years.
“This is very important right now, especially coming out of the pandemic. People may be cobbling together two jobs or be working one job part time,” Dudley said.
▪ Paper statements. People would be required to get annual paper statements showing the status of their retirement benefits. AARP strongly supports this feature.
Certner said it allows people to more easily understand and manage their different plan options and track the amount of their benefits.
Many people, particularly retirees and those with lower incomes or who live in rural areas, may not have access to broadband or be adept at navigating electronic information.
▪ Student loan debt. The proposed legislation would allow employers to match contributions to retirement accounts according to the employee’s student loan obligations. In other words, instead of simply going into a retirement account, as an employer match now does, the match would go towards paying off the loan.
▪ Small incentives for employee contributions. Employers cannot offer incentives to people who contribute to a retirement plan. The bill would allow small incentives, such as gift cards.
David Lightman is McClatchy’s chief congressional correspondent. He’s been writing, editing and teaching for nearly 50 years, with stops in Hagerstown, Riverside, Calif., Annapolis, Baltimore and since 1981, Washington.