State Street Wants Congress to Mandate Employee Retirement Plan Contributions

June 07, 2016 at 11:39 AM
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Ronald O'Hanley, the president and CEO of State Street Global Advisors, has written an open letter to Congress advocating for new federal legislation that would extend employer-sponsored retirement plans.

"Nearly 40% of working households still have no access to an employer-sponsored defined contribution (DC) plan, which has become the foundation for retirement savings in the U.S," writes O'Hanley, noting that the Employee Benefit Research Institute estimates a shortfall of more than $4 trillion in retirement savings as a result.

O'Hanley proposes that Congress pass new legislation that would:

  • Require private employers to auto-enroll all workers in a defined contribution plan
  • Require auto-escalation of contributions in such plans plus default investments such as target date funds
  • Enact tax credits to help small employers cover the administration costs of implementing a DC plan
  • Eliminate barriers to open Multiple Employer Plans (MEPs) so that businesses can bank together to offer affordable plans

He writes that the current system of patchwork initiatives from the White House, Congress and various states is complex and inefficient and could "perversely lead to lower savings levels."

State Street's initiative, called "Moving the Coverage Needle: Towards a National Framework to Address Retirement Access and Coverage," is focused on the more than 33% of full-time private sector workers who don't have access to a workplace retirement plan.

According to a printed copy of the plan, written by Managing Director Melissa Kahn, there would be an auto-enrollment requirement that begins at 6% of employees' salaries — about twice the auto-enrollment level of many existing DC plans — that would escalate automatically to 12% over three years but it could be set higher by employers. Employees would be allowed to opt out.

While employees would be required to defer a percentage of their earnings to the retirement plan, no employer contribution would be required and employers in business for less than three years would be exempt from the plan. Small employers, defined as having no more than 100 employees, could receive a tax credit to help defray costs to set up such a retirement plan.

The plan "can be viewed as a mandate, but in actuality it is relief from being subject to up to 50 or more state and municipal mandates, which would be pre-empted by this federal proposal," according to the printed version. About half the states in the U.S. are considering state retirement plans and the White House, which supports such state plans, previously launched MyRA for employees without a work-based retirement account. Unlike a 401(k) plan, it accepts only after-tax contributions and invests only in Treasury securities.

The White House has also proposed automatic enrollments in traditional IRAs for workers without access to work-based retirement plans as well as initiatives that would make it easier employers to offer retirement plans for employees. They include multiple employer plans and tax credits for small employers, which are similar to what State Street is pushing.

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