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A bipartisan group of Senators – Booker (D-NJ), Cotton (R-AK), Heitkamp (D-ND) and Young (R-IN) – have introduced four bills designed to increase employee savings.
In this article we focus on two of these proposals that are designed to incentivize short-term savings, the “Strengthening Financial Security Through Short-Term Savings Accounts Act of 2018” and the “Refund to Rainy Day Savings Act,” and consider why these proposals may be significant for retirement savings policy.
We then briefly discuss the other two proposals, which address Open MEPs and make certain changes to the 401(k) automatic enrollment ADP testing safe harbor. We conclude with a brief discussion of the possibility of Congressional action on retirement policy generally, before the November 2018 elections.
S. 3218 would authorize an employer to “make available to employees a stand-alone, short-term savings account, using an automatic contribution arrangement.” The account would have to have no minimum balance requirement and reasonable fees, and the balance would have to be readily available. The intention appears to be that the account would be established at a bank, credit union, or payroll card provider.
Employers would have “fiduciary responsibility” to ensure that (1) the account meets certain requirements (e.g., that fees are reasonable), (2) amounts are properly deducted from wages and transferred to the account, together with necessary identifying information, (3) “employees have clear instructions and an easy means to make changes to contributions or stop them entirely at any time” and (4) employees have clear guidance on how to access their money. The bill provides explicitly that employers would have no other fiduciary responsibility with respect to these accounts.
The bill would preempt state laws that “directly or indirectly prohibit or restrict the use of an automatic contribution arrangement for a short-term savings account, as if it were an ERISA plan.”
Finally, the bill would require that within a year from enactment Treasury issue guidance that interprets and applies tax-qualified plan rules “in a manner that facilitates the offering and operation, including automatic enrollment and automatic escalation, of short-term savings arrangements as part of or in conjunction or coordination with, any such tax-qualified plan or arrangement.” (We note that many would argue that this sort of program is in fact already permitted under current rules.)
S. 3220 would generally allow a taxpayerto defer 20% of her tax refund and have it deposited in a “Rainy Day Fund” that would be invested in US Treasury bills. The bill would also authorize a “matched savings account pilot program” using “Assets for Independence (AFI) Act” funds, for eligible individuals (presumably eligible under the AFI program).
The significance of this proposal for retirement plan sponsors is that it could possibly provide a source (including federal matching funds) for short-term savings for low-paid individuals and encourage individuals who do have the ability to save (for the short-term) a convenient way to do so.
These two bills reflect (among other things) proposals made by the Bipartisan Policy Center in its 2016 report on Retirement Security and Personal Savings. One of the (six) broad recommendations the BPC made was the adoption of policies to “Promote Personal Savings for Short-Term Needs and Preserve Retirement Savings for Older Age.” The BPC explained the connection between the promotion of short-term savings and the preservation of retirement savings as follows:
Research indicates that 57 percent of individuals are not financially prepared for an unexpected shock to their finances. … Americans need to increase their personal savings so that they are better positioned to handle emergencies and major purchases. Insufficient short-term savings can lead workers to draw down their retirement accounts, incurring taxes and (often) penalties. This “leakage” of retirement savings – while it might address an immediate financial squeeze – jeopardizes many Americans’ long-term retirement security.
Low-income individual generally have a higher preference for cash over retirement savings, for a couple of reasons. First, they have less “save-able” income. The choice (with respect to, e.g., a 401(k) plan) is often not between saving or non-essential spending, it’s between saving or paying the rent. And, second, the tax incentives for saving (e.g., in a 401(k) plan) are less compelling or nonexistent – for instance, joint filers with less than $77,200 in taxable income pay no investment taxes.
A number of features of the 401(k) system address this issue. Most obviously, the actual deferral percentage (ADP) nondiscrimination test incentivizes sponsors to include design features – matching contributions and nonelective contributions – that provide a financial incentive for retirement savings. And liquidity features, such as plan loans and hardship withdrawals, give participants with cash flow “challenges” access to their retirement savings for short-term needs. Indeed, the Employee Benefit Research Institute found that “Giving employees the option of borrowing from their 401(k) accounts increased participant contribution rates. On average, a participant in a plan offering loans appeared to contribute 0.6 percentage point more of his or her salary to the plan than a participant in a plan with no loan provision.” (Holden, Sarah and Jack VanDerhei, Contribution Behavior of 401(k) Plan Participants, EBRI Issue Brief and ICI Perspective (2001).)
But – as the above quote from the Bipartisan Policy Center indicates – these liquidity features are also perceived as a problem: “leakage” from the retirement savings system that jeopardizes retirement security.
The theory of these new proposals is that, by using the same tools used to encourage retirement savings – defaults, payroll deduction and (in some cases) matching contributions – to encourage short-term (“rainy day” fund) savings, sponsors can provide a positive solution to low-income employees’ liquidity challenges.
This argument, however, begs a significant question: will the creation of a short-term savings fund simply divert contributions that would otherwise have been made to the 401(k) plan, compromising the plan’s ability to pass the ADP test? If not, where will these additional savings come from, given that (depending on who you read) 25%-50% of American workers spend all (or more than) their paycheck each month?
The two bills addressing short-term savings incentives were part of a package that also included S. 3219, authorizing Open MEPs, and S. 3221, making certain modifications to the current automatic enrollment 401(k) nondiscrimination testing safe harbor.
The Open MEP proposal is in most respects identical to the proposal made by Congressman Neal, which we discussed in detail in our article Current legislation: Neal Automatic Retirement Plan proposal.
The modification to the automatic enrollment 401(k) nondiscrimination testing safe harbor allows small employers (with 100 or less employees) to provide reduced (or no) qualified matching contributions (QMACs) and qualified non-elective contributions (QNECs) for non-highly compensated employees under the safe harbor, in exchange for a reduced elective contribution limit.
More significant for larger employers, the proposal would modify the safe harbor to require automatic re-election: the plan would, every three years, generally have to default (at the safe harbor’s default contribution rate) any employee who is eligible to participate and contributing less than 3% of compensation.
As we noted at the top, these proposals have bipartisan support in the Senate. There are a number of other bipartisan retirement savings policy proposals in Congress (see, e.g., our article Legislative update – June 2018), addressing (among other things) missing participants, an increase to the cash-out dollar limit, “closed groups” and nondiscrimination testing, a defined contribution plan annuity safe harbor, and electronic participant disclosure.
The challenge, of course, is finding a legislative vehicle for one or more of these proposals. Possibilities include (1) possible Congressional action on the multiemployer crisis and (2) the next round of spending legislation (the current authorization runs out September 30, 2018).
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We will continue to follow these issues.