Retirement policy proposals put forth by the Democratic candidates, if they come to fruition, will certainly affect individuals’ retirement strategies, as well as the financial services industry.
Both Joe Biden and Bernie Sanders say they will shore up Social Security. The Social Security Board of Trustees says the combined assets of the Old-Age and Survivors Insurance (OASI) Trust Fund are projected to become depleted in 2034, with 77% of benefits payable at that time.
No. 6 on Sanders’ 21st Century Economic Bill of Rights is “the right to a secure retirement.” The proposal doesn’t give details other than that he will pass legislation to expand Social Security benefits and “expand and extend Social Security for the next 52 years by making sure that all income over $250,000 a year is subject to the Social Security payroll tax, with the Social Security Expansion Act.”
Under “The Biden Plan for Older Americans,” Social Security will also be on a path to long-term solvency by making “Americans with especially high wages pay the same taxes on those earnings that middle-class families pay.” Biden’s plan also proposes increasing the timing and/or amount of benefits for certain groups of people, including an increase in benefits for people who have received Social Security for at least 20 years.
Social Security is an important part of retirement income planning, and an increase in benefits for retirees at older ages has been a concern some suggest should be addressed by deferred income annuities.
Chad Parks, founder and CEO of Ubiquity Retirement + Savings in San Francisco, says the candidates know that to shore up Social Security, they must increase the taxable wage base, but they also need to increase the retirement age and increase the percentage of wages being contributed toward Social Security.
While shoring up Social Security is a good plan, Steve Frazier, AIF, president of Rhode Island-based Frazier Investment Management, says it could be a disincentive for some people to save on their own. Certain employees may pull back on their DC plan contributions because they believe the government will provide retirement income for them.
Biden’s Auto IRA
Under Biden’s plan, almost all workers without a pension or DC plan will have access to what he calls an “automatic 401(k),” which provides the opportunity to easily save for retirement at work.
“It’s pretty well-established that Democratic legislators that are moderates, as is Biden, support automatic individual retirement accounts or auto IRAs,” Parks says. “If we look at the states that have already taken action on it in a similar format as Biden is talking about, all are Democratic-leaning.”
He says he wouldn’t be surprised to see legislation on a national level if the election goes not only to a Democratic president, but a majority Democratic House and Senate. And he says there’s a potential that existing state plans would move to the national level.
If a national auto-IRA proposal came to fruition, the effect on the financial services industry would depend on whether the government designed and administered the auto-IRA or whether a retirement plan provider did so, Parks says. He notes that so far no one in the Biden camp has indicated it wants to bring the government into retirement plan administration.
“If it’s a government-administrated plan, it would shake up the adviser industry,” Parks says. “If providers solve the mandate, there will still be a role for advisers, but if the government takes over, we’ll all be out of business.”
He thinks it’s highly unlikely that would happen because current “state government-run plans, frankly, are less attractive than custom-designed or even provider turnkey 401(k)s—they have more plan design features and employer contributions. “Even SIMPLE [savings incentive match plan for employees] plans have higher savings limits and more flexibility,” Parks says.
He says one of the reasons the government is paying attention to retirement issues is the reported lack of coverage for small business employees. Parks says, traditionally, the financial services industry has ignored the smallest of plans because there is not enough revenue in serving them. “As an adviser, you’re most likely not interested in that business because it’s an issue of how to get paid something that’s fair. So, if the smallest of businesses are covered by a national ‘auto-401(k)’ that’s not a threat to advisers,” he says.
However, he adds, if advisers are looking at opportunities in the micro plan market, it would be best if they positioned themselves as a 3(38) investment manager since that means they can have responsibility over investments. “They can do this in a highly leveraged rather than individualized way,” he says.
Frazier also says a nationwide plan “probably wouldn’t hurt the financial services industry too radically. He adds, “Not to overgeneralize, but people that work with advisers probably have more assets, so there probably won’t be much of an overlap with [people who save in a national plan].”
Multiemployer and Nonqualified Plans
“The Workplace Democracy Plan” from Sanders says, “Because of a 2014 change in law instituted in the dead of night and against the strong opposition of Senator Sanders, it is now legal to cut the earned pension benefits of more than 1.5 million workers and retirees in multiemployer pension plans.” It says, if elected president, Sanders would sign an executive order to impose a moratorium on future pension cuts and would reverse the cuts to retirement benefits that have already been made. In addition, it says he will fight to get the Keep Our Pension Promises Act he first introduced in 2015 passed—which would prevent pension benefits from being cut. Again, Sanders points to making “the wealthiest Americans” pay “their fair share of taxes” as a way to protect multiemployer pensions.
Frazier says he’s not sure how the government “can force all businesses to become a pension stream insurance company without a government backstop” and he questions how the government can force businesses to spend money they don’t have. “Going forward, there can be some kind of backstop to prevent future cuts,” he says. The current approach favored by Democrats in the House of Representatives would establish a government-backed loan program to assist troubled union pensions.
Sanders’ plan could lead to a reduction in offering pensions in the future, Frazier says, “which is the opposite of what we are trying to do.”
Parks says he’s all for changes to multiemployer plan pension benefit cuts. “Just because providing benefits becomes inconvenient or expensive, plan sponsors must keep the promises they made,” he says. “If anything, it would keep the adviser marketplace stable and at least those funds would have a large enough asset pool that advisers could advise for the plans.”
However, he notes that without help, Sanders’ plan would put multiemployer plans back to where they were. And it could increase troubles for the Pension Benefit Guaranty Corporation (PBGC), which is already having problems. “There’s only so many levers that can be pulled to improve multiemployer plans’ status,” he says.
What concerns Frazier more than other proposals is Sanders’ plan to change tax rules for nonqualified deferred compensation (NQDC) and equity compensation plans. Sanders and Senator Chris Van Hollen, D-Maryland, introduced legislation in February to end tax advantages for executive retirement plans. According to a bill summary, it would include deferred compensation in taxable income when it vests rather than at distribution. Internal Revenue Code (IRC) Section 409A would be revised to require nonqualified deferred compensation and equity-based compensation to be taxable when there is “no substantial risk of forfeiture.” Under the bill, workers that are not considered highly-compensated employees under the IRC would be taxed on equity-based compensation when benefits are received. All revenue raised from the changes would be transferred from the Treasury to the PBGC to shore up multiemployer pensions.
Frazier says the changes would reduce executives’ incentive to save for the long-term. “Reducing the amount people will save means there will less money for advisers to manage,” he points out.
Parks says if the changes come to fruition, plan sponsors and their advisers will be looking for the next big thing to help executives save more. “It would be disruptive,” he says.