Saving for retirement is undoubtedly a challenge for most Americans, which is why average retirement account balances are far too low, and 39% of American workers have nothing saved for retirement at all.
The good news is, there are efforts under way to try to increase savings rates. Lawmakers are currently considering bipartisan legislation in the form of the Retirement Enhancement and Savings Act of 2018.
The Retirement Enhancement and Savings Act includes several important provisions aimed at encouraging savings, as well as a change to the rules that would make it easier to invest in annuities to provide lifetime income. Let's take a closer look at what the bill includes.
What is the Retirement Enhancement and Savings Act?
The Retirement Enhancement and Savings Act contains a number of provisions aimed at encouraging small businesses to provide more help to employees in saving for retirement. It also makes a few other key changes. The act:
- Eases barriers to participation in Multiple Employer Plans (MEPs): MEPs allow smaller employers to share costs associated with administering defined benefit or defined contribution retirement plans. The act would modify current rules disqualifying MEPs if one company participating is noncompliant with rules. It would also modify an existing requirement mandating participating employers have a common interest, such as being part of different branches of a nonprofit or different branches of the same chain store.
- Provides financial incentives for small business to start new retirement plans and auto-enroll workers: The law increases the tax credits available to help defray start-up costs for small employers that start pensions. It also creates a new tax credit of up to $500 per employee for employers who establish a 401(k) or SIMPLE IRA plan that includes auto-enrollment.
- Repeals the maximum age for contributions to traditional IRAs: Currently, workers cannot contribute to a traditional IRA after age 70 1/2. The act repeals this maximum age.
- Makes it easier for employers to offer annuities and for employees to invest in them: The act provides a safe harbor protecting employers from liability if they allow workers to invest in annuities in workplace plans. It also allows employees to roll over annuity investments to IRAs providing the same benefits when leaving their jobs. Changing the rules to make it easier for annuities to be included in plans could help create a model similar to traditional defined-benefit pension plans providing guaranteed lifetime income in retirement.
- Requires benefits statements to provide information on lifetime income: At least once during each 12-month period, statements for defined contribution plans would need to detail the monthly income the plan owner would have if the account was used to provide lifetime income.
Together, these changes could both encourage more workers to save and help to ensure defined contribution plans become a more effective vehicle for providing lifetime income. However, annuities can be expensive and risky, so employees would need to carefully consider whether purchasing an annuity is an appropriate investment strategy.
Will the Retirement Enhancement and Savings Act actually pass?
Currently, the Retirement Enhancement and Savings Act is under consideration, and there is no guarantee it will ever become law.
A similar proposal passed the Senate Finance Committee in 2016 and died due to inaction when Congress adjourned, but there are serious efforts being made to advance the new bill in both the House and Senate.
The act has bipartisan support and some powerful outside supporters, including the AARP.
While there is criticism surrounding the legislation, much of it stems from concerns the act doesn't go far enough. The Tax Foundation, for example, asserts a more comprehensive solution should include a universal savings account and simplified rules for savers to correct the bias against savings in the tax code.
The act could help you save more
If the Retirement Enhancement and Savings Act passes, it could make a big difference to Americans if it incentivizes their employers to offer retirement plans for the first time or if their employers adopt policies auto-enrolling workers in retirement plans.
Auto-enrollment -- which requires workers to opt out of contributing to retirement plans instead of requiring them to opt in -- has been shown to increase participation in workplace retirement plans.
Incentivizing savings and opening up the door for more workers to save can only be a good thing in a country where far too many people are saving far too little.