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Last week I told you about some of Washington’s latest ideas on “fixing” Social Security. And the very next night — as part of his first State of the Union address — President Obama referenced some of his own ideas on the broader topic of retirement.
Today I’d like to run down these ideas … explain them … and tell you where I stand on each. By the way, details on all of these can be found on this White House webpage …
Idea #1: Establishing Automatic IRAs
According to the White House, approximately half of our nation’s workforce currently lacks access to an employer-based retirement plan.
To fix that problem, Obama wants to require employers who do not presently offer retirement plans to automatically enroll their employees in direct-deposit Individual Retirement Accounts (IRA).
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| Some of Obama’s retirement ideas are fine, but none of them can replace the role of personal responsibility. |
The default contribution rate would be 3 percent of pre-tax earnings, just like regular 401(k) plans. Participants could then decide to increase or decrease the amount being socked away.
They could also opt out of the plan altogether, which alleviates my concern about yet another governmental mandate replacing a personal freedom.
How would the money be invested?
The default option would likely be a diversified basket of investments, though individuals would be free to choose other strategies if they wanted to.
Now, in my experience, inertia IS a major reason people fail to take charge of their financial planning.
Plus, small employers would be exempt from the administrative hassles that this provision would create, while other employers would get financial help through tax credits.
So overall, I think this is a fine step on its own, and it will likely do more good than harm.
At the same time, an annual contribution equal to 3 percent of someone’s salary — invested conservatively — is clearly not going to solve their long-term retirement needs.
More troublesome to me is the fact that this plan will also include a potential taxpayer-funded contribution match via the “Savers Tax Credit.” But this is not a criticism of the automatic IRA plan itself.
And before I get to the savers tax credit, let me tell you about …
Idea #2: Subtle Changes to 401(k) Plans
The White House also wants to streamline the process for employers to automatically enroll their workers into existing 401(k) plans.
Again, I’m fine with this. Simply changing a company’s default option to enroll someone is a no-brainer.
And I’m also okay with other changes that the White House wants to see in the 401(k) arena, such as:
- Making it easier for workers and plan sponsors to understand the fees they’re paying for investments, record-keeping, and other services being provided by plan managers.
- Encouraging plan sponsors to provide employees with better information to help in their retirement planning (including unbiased investment advice and information on hard-to-understand investments such as target-date funds).
- Asking employers to consider providing other investment choices in their plans, such as annuities.
All of these steps are going in the right direction.
After all, employees should be given as many investment choices as possible. They absolutely need accurate, conflict-free information. And participants — as well as plan providers — should be very clear on just how much they’re paying in fees to investment management companies.
[Editor's note: If you'd like to get conflict-free retirement planning information right now, check out Nilus' new online retirement course.]
So far so good on the new retirement proposals, right?
Yes, but there’s still …
Idea #3: Expanding the Savers Tax Credit
This tax credit, which is already on the books, is supposed to give families a tax incentive to save.
Of course, only some families qualify. Those making under $65,000 a year can claim up to 50 percent of the first $1,000, and families making anywhere up to $85,000 can get a partial credit.
Already, I have two problems here:
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- Philosophically, I reject the idea of credits, deductions, and other loopholes. Not only are they always based on arbitrary lines in the sand, but they are the main reason our tax code has become so complex and convoluted.
- I think the idea itself misses the mark. Saving for one’s future shouldn’t require an external incentive. Besides, there are plenty of existing breaks available to people who choose to save right now — including the Roth IRA and its many advantages.
Hey, if the government wants to give everyone in the country $500 to put in a savings account, fine. It’s essentially a feel-good wash but at least it’s inclusive. THIS credit is just another misguided social program.
Worse yet, the White House wants to now make this credit refundable “to ensure that millions of additional middle-income families can take advantage of it even though they have no income tax liability.”
Wait, let me get this straight: There are a whole bunch of middle-income families who are not going to owe any income tax this year.
Therefore, those of us who do owe taxes should have some of our money incentivize those people to save?
Sorry, I just don’t get it. Nor can I support it.
And ultimately, the savers tax credit highlights the real problem with all of these new retirement measures — while they start with the best of intentions, they can’t replace the real secrets to a safe, secure retirement: Self-motivated planning and personal responsibility.
Best wishes,
Nilus
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