EARN Act: The Good, the Bad & the Ugly
On June 22nd, the Senate Finance Committee unanimously passed the Enhancing American Retirement Now (EARN) Act, which will be combined with the Senate HELP Committee's RISE & SHINE Act that was advanced earlier this month. These acts will be combined, and then reconciled with the SECURE 2.0 bill that was passed by the House of Representatives in March. There was also a Starter-k bill introduced in the House recently. These legislative changes, if enacted, could have material impacts on retirement savers, but some of these changes are misaligned with the average American family's financial aims.
There are some excellent provisions in each piece of legislation that would help Americans better manage the challenges of saving for retirement. These include:
Permitting matching contributions on student loan repayments. Despite the logistical challenges of managing this process, if enacted, this provision would assist plan participants who cannot save for retirement by rewarding them for making sound financial decisions outside the plan. We need more of this. The same could be done when an employee contributes to an IRA away from their employer’s plan, a college savings or other account for a minor child, emergency savings account, or other financial vehicles that would be indicative of the participant making sound financial decisions for their family.
Increasing the age where individuals must take required minimum distributions. RMDs serve no discernible purpose aside from generating revenue for the US Treasury. The more these get pushed back, the better.
Affording 403(b) plans similar vehicles as 401(k) plans. This includes permitting 403(b) plans to participate in group trusts and the ability of 403(b) sponsors to join a multiple employer plan, including a pooled employer plan.
Increasing tax incentives for small businesses to offer a new plan. The cost of a workplace retirement plan is a significant barrier to small business owners offering the benefit to employees. Increasing tax incentives for starting a plan offsets these costs a bit and should help more Americans gain access to a workplace savings plan.
Maybe "bad" is a stretch. Unnecessary is probably a better descriptor. There are several provisions that look like solutions looking for a problem. These add unwanted complexity without delivering much value to American savers. Among these provisions are:
A new safe harbor design to stretch the matching contributions. While financial institutions would love to see 10% deferral rates across the boards, it's simply not feasible for many savers, especially those earning lower wages. In a society raging for inclusivity, creating a safe harbor design that's unattainable to many feels like a miss.
A provision allowing for withdrawals for emergency expenses. Hardship distributions are already permitted as options in 401(k) plans and plans can opt to use facts & circumstances instead of the safe harbor, which gets us to the same place. Also, we can't advocate for auto-enrollment/escalation at the same time we recognize that many employees can't afford even small surprise expenses.
US Treasury managing Retirement Savings Lost & Found. Lost participants are an issue, but most lost participants are not really lost, they are unresponsive. Further, private enterprise is better positioned to provide quality offerings than the US Treasury, in my opinion.
Employee finances don't revolve around their 401(k) accounts and they shouldn't. Family finances are often complex. Increasing 401(k) balances does not necessarily improve a worker's financial situation. The ugly parts of this act are largely provisions that exist to drive money into financial products whether it's appropriate or not. These include:
The ability to pay up to $2,500 annually for long term care (LTC) insurance premiums. First, $2,500 isn't going to cover the whole LTC premium in most cases. These policies tend to be very expensive - so much so that it's rare that a LTC will rarely be appropriate for a 401(k) participant.
Revenue provisions. I understand the need for bills to be fiscally responsible, but there are two provisions that will subtlety put the cost burden of this bill on the shoulders of the very employees the bill aims to help. Worse yet, those employees will see the higher tax burden as beneficial to them. Limiting catch-up contributions to Roth is a mechanism that will likely cause savers to pay taxes in a higher tax bracket than they will be in post-retirement. Many workers eligible for catch-up contributions are in their peak earning years and, consequently, a higher tax bracket. Similarly, the provision to allow matching contributions to be Roth will undoubtedly cause workers to go along with that too. There is very little, if any, real guidance for participants regarding how to optimize their taxes, soothes provisions will confound enough participants that it becomes a material "revenue" provision. It's great for Treasury, but not great for participants.
Starter-k. Without going into too many details, the Starter-k proposed is effectively the same as a payroll deduction IRA offering, which is available today. The big difference is that the Starter-k would come with automatic-enrollment, administration requirements, costs, and employer fiduciary responsibilities that don't exist in the payroll deduction IRA programs.
Provisions incentivizing automatic enrollment. I used to think automatic features were good. They certainly make the plan look good. They don't move the needle though when you look at a family's overall financial picture though. These provisions hurt employees who accept the defaults without looking at the bigger picture. We need to incentivize sound financial decisions without hyper focusing on saving in retirement plans.