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Last month, we saw the introduction of two pieces of pension legislation, Senator Harkin’s (D-IA) long-awaited USA Retirement Funds Act (USARF) and Senator Collins’s (R-ME) Retirement Security Act of 2014 (RSA 2014). The Administration also unveiled a new auto-IRA initiative, the ‘_my_RA’ (which got a mention in the President’s State of the Union Address).
In this article we briefly discuss the RSA 2014 and _my_RA initiatives. We will review Senator Harkin’s legislation in detail in a separate article.
RSA 2014 does a couple of things worth noting:
1. It addresses certain ‘multiple employer plan’ issues. A multiple employer plan is, generally, a plan covering employees of more than one unrelated employer that is not established as part of a collective bargaining agreement. Multiple employer plans (MEPs) have drawn attention lately as a possible way of providing efficient retirement plan services to smaller employers. MEPs present a number or regulatory challenges.
RSA 2014 would allow:
(1) A MEP to be treated as satisfying Tax Code qualification requirements despite a violation with respect to one or more participating employers.
(2) ‘Qualified’ MEPs to cover employers that do not share a common interest. A qualified MEP generally only covers employers with 500 or fewer employees.
The USARF also addresses MEP issues.
2. It would add a new 401(k) automatic enrollment safe harbor using higher default contribution rates than under current rules, as summarized in the following table.
| Year | Contribution Rate |
| Initial period (year of initial contribution and next plan year) | At least 6% (but not greater than 10%) |
| 2nd full plan year | At least 8% |
| 3rd full plan year | At least 10% |
To qualify for the new safe harbor, the sponsor would have to make matching contributions for NHCEs as summarized in the following table.
| NHCE contributions (as a % of pay) | Matching Contribution Rate |
| First 1% | 100% |
| Greater than 1% but not greater than 6% | 50% |
| Greater than 6% but not greater than 10% | 25% |
These matching contribution rates are higher than new safe harbor proposals in last year’s Neal and Hatch bills.
RSA 2014 includes a tax credit for small employers establishing this sort of safe harbor.
One of the Administration’s top retirement savings priorities has been to expand coverage, particularly for lower-paid employees, through the use of payroll deduction IRAs. There are (at least) three challenges to this expansion of coverage: (1) How do you get employers that do not maintain a retirement plan to set up payroll deduction IRAs? (2) How do you get uncovered employees to save in those IRAs? and (3) How do you find financial institutions that are willing to take the very small account balances likely to be generated by such a program?
The Administration’s auto-IRA proposal would address challenge (1) by mandating that employers that do not sponsor a retirement plan set up a payroll deduction facility and address challenge (2) by requiring that those employers automatically default participants (subject to an opt-out) into a contribution (e.g., 3% of pay) to that IRA. This auto-IRA proposal has not attracted much interest in Congress because of opposition (by some) to the mandate and because it costs money (by increasing deductions for retirement savings it would reduce revenues).
The _my_RA proposal would address challenge (3) – how do you efficiently invest small account balances? Basically, the Administration is proposing to invest them in a Treasury security that earns the same rate as Government Securities Investment Fund in the Thrift Savings Plan for federal employees. Here are the details as we understand them (as of this writing there is no actual formal proposal, only a fact sheet and set of FAQs).
A _my_RA would be a Roth IRA investing in a Treasury security. “Participating employers” (employers who (somehow) sign up for the program) will set up a direct deposit facility with the Department of the Treasury. Employees eligible under the Roth IRA income limits ($129,000 a year for individuals and $191,000 for couples) may (voluntarily) contribute as little as $25 to establish an account and may (via direct deposit) contribute up to the Roth IRA limits to the _my_RA. As stated, the security (investment) will pay returns “at the same variable rate as the Government Securities Investment Fund in the Thrift Savings Plan for federal employees.” This program will be rolled out sometime towards the end of 2014. Presumably we will get more specifics and more formal rules before then.
At the risk of repetition, the my_RA does _not require employers to set up a payroll deduction facility and does not provide for automatic enrollment. It does however create what the Administration believes will be an efficient and appealing investment vehicle for the small accounts generated when coverage is extended to low-income individuals. When the account reaches a level of $15,000, it will be “rolled over to a private-sector retirement account.”
We will consider the issues presented by a mandatory, auto-enrollment program in our article on Senator Harkin’s USARF proposal.
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Retirement remains an important strategic policy issue, but current politics – divided (and polarized) government and an election year – will make progress on any but the least controversial issues difficult. Further, given budget issues and competing policy demands, anything that costs money (e.g., the Administration’s auto-IRA proposal) will have a difficult time. That said, the proposals included in RSA 2014 will become part of the policy conversation and may be taken up when legislation that has a chance of moving emerges.
The President’s _my_RA proposal does not (by design) require Congressional approval.
Our next article with review Senator Harkin’s USARF proposal in detail.