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The USA Retirement Funds Act Is Good Legislation

Three reasons why.

John Rekenthaler, 02/10/2014

An Individual Solution
The USA Retirement Funds Act does not call for additional government expenditures  other than the modest costs of overseeing the program. Nor does it burden employers. In fact, by creating a nationally available 401(k) lineup--the USA Retirement Funds--that automatically satisfies ERISA standards, the Act would relieve employers of their current, fiduciary-related costs.

In placing the responsibility for retirement saving on the individual rather than on the government, the Act follows the American tradition for retirement planning. As shown in the graph below (taken from Pensions at a Glance 2013: [English may not have been the authors' first language--the document has 368 pages!] Retirement-Income Systems in OECD and G-20 Countries), U.S. senior citizens receive a relatively low share of their income from the government:

In most developed countries, government payments account for 60%-plus of income for those over the age of 65. In the United States, that figure is less than 40%, with the gap filled by higher private pensions (once defined-benefit schemes, paid from company coffers, but increasingly 401(k) plans, funded primarily by the individual worker) and by employment, as Americans are likelier to work at older ages.

None of this matters to me. I can live with an individual solution, a government solution, or an employer solution. But I realize that only one of the three appears to be feasible politically. The government solution requires higher tax rates and the employer solution would raise businesses' costs. There is little collective appetite for those sacrifices. Thus, I believe, successful 401(k) legislation must emulate the USA Retirement Funds Act in retaining the existing retirement framework.

(For a dissenting view, see Jane White's The Senate's Plan for Our Retirement: Inadequacy for All, as well as her white paper on ensuring America's retirement. White fervently argues for the employer solution.)

Raising the Floor
The USA Retirement Funds Act doesn't do much for those at the top of the retirement heap. It mandates the availability of a low-cost 401(k) plan, and it automatically enrolls all participants at a 6% savings rate. Those who now work at a relatively large company with a good 401(k) plan and who invest at 6% or more will see few benefits from the Act.

Instead, the Act is aimed at those further down the ladder. For the rank-and-file, tens of millions of whom currently do not have a 401(k) account; or who may have an account but must invest in high-cost funds because they work at a small company; or who theoretically could open a 401(k) but who need the prod of automatic enrollment to get started, the Act would be of great assistance.

is vice president of research for Morningstar.

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