Trump takes a first step to boost retirement security
President Donald Trump recently issued an executive order aimed at strengthening retirement security in America. It's a step in the right direction, but tackling two additional issues would truly address the pressing needs of working Americans who want to save for retirement.
Mr. Trump's Aug. 31 order directs the Department of Labor and the Department of Treasury to encourage the adoption of multiple employer plans (MEPs), which allow small employers to pool resources and costs to offer retirement plans to their employees. This is good news, given that only about half of all workers are covered by a retirement plan at work. Research shows that having one significantly boosts workers' accumulation of retirement savings.
MEPs also represent a way for the private sector to better address the needs of working Americans. A mutual fund company, bank or insurance company could develop and offer an MEP that unrelated employers could adopt to cover their employees. The financial institution could take care of all the administrative steps that often create significant hurdles that may stop small employers from adopting retirement plans. Among them are the plan's design, investment options and administrative paperwork.
All the small employer would need to do is gather employees' savings through payroll deduction and send them to the MEP. Enabling MEPs is truly low-hanging fruit in the retirement world because they have bipartisan support as well as backing from the financial industry.
Mr. Trump's executive order contained two other initiatives:
- Restructuring and potentially postponing the IRS required minimum distribution rules. These rules require minimum amounts to be withdrawn from traditional IRAs and 401(k) plans at age 70-1/2 that are included in the retiree's taxable income. This feature is primarily of interest to affluent retirees who wish to further delay taxation of income, and they'll welcome this change. However, this initiative does little to increase retirement security for most working Americans.
- Reducing administrative paperwork required by retirement plans. While that's definitely a desirable goal, it will do little to broadly improve retirement security. Employers who currently sponsor a retirement plan have already figured out how to comply with administrative requirements, which aren't the only barriers for small employers that don't offer retirement plans.
Once these changes are enacted, policymakers can turn to more pressing matters. First up? The tough job of securing the financial viability of Social Security using some combination of raising taxes and reducing benefits. Social Security provides the largest piece of retirement income for most retirees, yet a majority of American workers worry that it won't be there for them when they retire. Shoring up Social Security can go a long way to bolstering Americans' retirement security.
The next step would be to encourage employers to offer options in their retirement savings plans to convert account balances into reliable retirement income. This task is beyond the skills of most workers, and employers can provide tremendous value by offering a "check the box" limited menu of retirement income options.
Congress has been considering the Retirement Enhancement and Savings Act of 2018, which would both enable MEPs as well as encourage 401(k) plan sponsors to offer lifetime annuities in their retirement programs. Again, this legislation is a big step in the right direction, but it could go further by allowing employers to also offer a retirement income menu that includes both investing and annuity retirement income programs.
Step one, the president's executive order, is encouraging. But voters need to continue encouraging Congress to tackle the toughest issues so that all workers can retire with financial security and dignity.