Joe Biden and US Pension Reforms
Joe Biden and US Pension Reforms
The new Joe Biden administration is unlikely to revolutionise US pension plans, but it could broaden the base of workers able to join defined contribution plans such as 401(k)s. It may also cancel recent rules and return to the previous regulations set under Barack Obama.
The president-elect wants to restructure the tax incentive on contributions to 401(k) plans. These currently let individuals take an immediate deduction from the income they pay taxes on. “His proposal is a desirable change on equity grounds,” says Alicia Munnell, director of the Center for Retirement Research at Boston College. “The current system gives the biggest reward to high earners. If a single earner in the top income-tax bracket contributes $1,000 (€820), for example, he saves $370 in taxes. For a single earner in the 12% tax bracket, that $1,000 deduction is worth only $120. Biden wants to introduce a flat tax credit, which is estimated to be 26%. Thus, low-wage workers would be rewarded more than under current law and those in the top brackets somewhat less. And the credit would be refundable so that even workers with no tax liability would benefit from putting $1,000 into a 401(k) plan.”
As under current law, earnings would continue to accrue tax-free, and withdrawals at retirement would still be taxed as regular income. “It is a relatively small change and I don’t understand why the financial services industry would oppose it,” she says
More important, according to Munnell, is the coverage gap. She emphasises that in the US only about half of private sector workers are covered by an employer-sponsored retirement plan. “The Securing a Strong Retirement Act, a bipartisan bill that was introduced in October 2020, would bring a significant improvement by requiring that all new 401(k) plans must have auto enrolment,” she says.
“But even better would be to follow the lead of states such as Oregon, California and Illinois, which have successfully created mandatory auto-Individual Retirement Accounts [IRAs],” says Munnell. “These require employers without a retirement plan to auto-enrol their employees in an IRA. The Biden campaign supported the idea of adopting a similar system at the federal level and that would make a big difference.”
The retirement provisions included in the Securing a Strong Retirement Act appear to have bipartisan support and so may be approved by the new Congress, according to Beth Ashmore, managing director of retirement at Willis Towers Watson. “They aim to increase retirement savings, encourage plan sponsorship, improve plan investment options, and ease plan administration and compliance burdens. Some of the features that might have the greatest interest from employers are items like the student loan matching provision, which would allow employers to treat employees’ student-loan payments as elective deferrals for purposes of providing matching contributions in the savings plan, and compliance provisions which would expand the self-correction programme for administrative errors, providing fiduciary relief in situations of plan overpayments, and some streamlining of plan notification requirements.”
Biden’s focus will also be to revisit recent guidance about ESG investing and fiduciary duty, according to Brian Graff, CEO of the American Retirement Association.
Shortly before last November’s election, the Department of Labor (DoL) finalised a rule that limits the ability of retirement plan sponsors to consider environmental, social and governance (ESG) factors when choosing investment options. In addition, the DoL issued a proxy voting proposal that directed fiduciaries to act in accordance with the economic interest of the plan and its participants based only on factors they “prudently determine will affect the economic value of the plan’s investments”.
Moreover, the Trump administration cancelled the Obama-era DoL rule requiring all advisers and brokers who work on retirement accounts to act as fiduciaries and put their clients’ interests above their own. Now only registered investment advisers must act as fiduciaries, while the rest just have to prove that the investment they recommend is suitable.
“I expect that Biden will reinstate Obama’s rules,” says Graff. “My association thinks that offering ESG investment options to 401(k) members is OK but we are concerned that the US is going to adopt a European approach to this matter. We wouldn’t like a mandate to apply ESG criteria to all investments, an idea that France is considering.”
Concerning ESG and fiduciary rules, Ashmore expects “plan sponsors and fiduciaries will want to stay abreast of a potential shift in position and understand how it may affect their evaluation of potential investment options and how they monitor their service providers.”
Finally, Munnell emphasises that the big change that Biden has promised is to support and preserve the social security system, which is the first pillar of the retirement system. “It is very important that he will not cut benefits,” she says.