On Sept. 9, the House Ways and Means Committee approved a section of the Build Back Better Act, the $3.5 trillion reconciliation bill, that would require employers to have an automatic enrollment retirement plan for employees.
“Our country currently faces a retirement income crisis," Chairman Richard Neal (D-MA) said in his press release. "Nearly one-third of Americans have no retirement savings at all, and about half of working-age households risk being unable to maintain their current standard of living after retiring.”
However, with Congress debating the future of this bill, sections like this one could be cut or reduced.
While this piece has not officially passed the House, if it does become law it will greatly affect the average person’s ability to save for retirement. According to the Center for Retirement Research at Boston College, over the past 30 years, there have only been about 50% of employees enrolled in some form of employer-sponsored retirement plan, such as a 401(k) plan.
The approved section would require all businesses that have five or more employees to enroll them automatically in a retirement plan, most likely in the form of an individual retirement account (IRA). Within 90 days of the enactment of this legislation, the Secretary of the Treasury will create an Automatic IRA Advisory Group. The Advisory Group will make recommendations to the Secretary and help monitor for any forms of noncompliance. If the employers do not comply, they would face a fine of $10 a day per employee.
While the bill requires employers to offer automatic enrollment, employees can opt out for any reason, including if they would rather use a different form of retirement savings.
While it was, for the most part, a party-line vote in the committee, two Democrats, Reps. Stephanie Murphy (D-FL) and Ron Kind (D-WI), joined Republicans in voting no on this provision. Murphy explained that she could not evaluate the benefits of the bill without knowing the exact cost of the bill, and without knowing the exact tax increases necessary to pay for it. Kind objected because he believes small businesses should be incentivized to have automatic retirement plans, but they should not be mandated. If passed by both the House and Senate, the legislation would go into effect after Dec. 31, 2021.
Several organizations and experts do support the bill, however. For instance, the American Retirement Association (ARA) has offered its support for the retirement provisions contained in the Build Back Better Act.
The ARA noted in a press release that enactment of the retirement subtitle of the Build Back Better Act would create 62 million new retirement savers and would add an additional $7 trillion in retirement savings over a 10-year period. What’s more, nearly all — 98% — of these 62 million new savers earn less than $100,000 per year, the ARA noted.
David Blanchett, the head of retirement research at PGIM DC Solutions in Lexington, Kentucky, also said the bill would start to close the coverage gap in retirement savings.
“If you have a voluntary enrollment scheme, usually, it's half or less than the participants in the plan, choose to be in the plan, but if it's auto-enrollment, it's usually well north of 80%,” said Blanchett. “If you offer a plan, and you auto-enroll people, well you're going to see again like this huge jump.”
In addition, the Employee Benefit Research Institute has consistently shown in its research that a worker's confidence in being able to retire to a desired standard of living is highest among those with an employer-sponsored retirement.
During the committee meeting, the biggest concern was having the exception start at only five employees. This number seemed too small in many congressmen’s eyes. Previous retirement regulation had the small-business exemption be for businesses with 50 or fewer employees.
According to Blanchett, this plan will help individuals more than it hurts businesses. Experts say the hardest part of investing for retirement is starting. Guaranteeing the majority of individuals will start saving will exponentially help people retire.
“The reason that a lot of people don't save for retirement is because it's not easy," said Blanchett. "I think that what these plans do, is they just automate the decision to save for retirement. So I totally get the fact it's going to create additional burdens on running a business, but given where the retirement security is today for folks that don't have plans... it needs to happen because these folks would be better off because of it.”
Because of the repercussions of the non-compliance tax, it is more economically efficient for businesses to utilize an automatic enrollment plan.
“It can be administratively burdensome (but) there (are) things you can do to kind of ease that," he said.
Another complaint against this section of the bill was that it infringes on work done in the SECURE Act 2.0 which had bipartisan support. The SECURE Act 2.0, which is unrelated to the Build Back Better Act, would allow workers to simultaneously save for retirement and pay off their student loans. Some Republican Congress members argued during the hearing that this section of the Build Back Better Act would be unnecessary given the fact that the SECURE Act 2.0 exists with bipartisan support to be voted on shortly.
Some Democrats argued that this section of the bill only builds off of the SECURE Act 1.0 so it would not be a problem.
“The chairman's SECURE 1.0 signed into law in last Congress had laid the groundwork to provide access to private retirement plans," said Rep. John Larson (D-Conn) during committee hearings. "We are expanding on this effort today, to ensure that more Americans are ready for retirement by requiring employers that don't currently sponsor a retirement plan to automatically enroll, employees in IRAs and 401(k) type plans."
There are similarities between the two pieces of legislation, mostly because they both have to do with how citizens can save for retirement, however, one does not necessarily negate the other.
As debates continue, keep an eye on where this section of the bill ends up.