The 2020 Election’s Impact on Retirement: What’s Next?
The election results are in. Plan sponsors may need to prepare for possible changes as we enter a new term with President-elect Biden.
America has just cast their ballot in what many might consider one of the more consequential elections in recent history. The economic impact of COVID-19, in particular, has brought heightened focus on long-term financial security for both individuals and businesses, putting greater emphasis on the policies that govern the retirement system, as well as the accessibility of plans and ease of saving for the future.
Even before the lockdowns and the resulting impact to the nation’s unemployment numbers, the fragility of the retirement system was already a concern for both sides of the political aisle. President-elect Biden’s victory brings with it several reforms and proposals that aim to provide more equitable access to retirement accounts, and incentivize more people to save. These efforts could have a significant impact on both employers and employees by changing how benefits are offered and administered in the workplace. David Kemps, Executive Director—Government Relations at Morgan Stanley, talks through three potential changes to the retirement system that may have some important implications for plan sponsors:
Incentivizing More Businesses to Sponsor Retirement Plans
Small businesses are an essential part of the American economy, employing nearly half of the U.S. private workforce,1 yet only four out of 10 small businesses offer retirement benefits.2 Many have been slow to offer retirement benefits, citing cost and administrative headaches as barriers to offering plans of their own.
Extending the relief under the recently passed SECURE Act, which stipulates that small businesses could claim a tax credit for startup costs and for adding an automatic enrollment feature to a 401(k) plan, the new Biden reform proposals look to potentially offer additional incentives for small businesses to adopt retirement plans.3 As of now, details around how the incentives would be structured have yet to be ironed out, but employers could expect to see an increase in one or both of the applicable credits, or any number of extensions to those policy changes made under the SECURE Act.4
“Other proposals that President-elect Biden proposed during his campaign include providing tax credits for small businesses to help with things like startup costs. The idea is to make [those incentives] even more attractive to small employers, motivating them further to help their employees save for retirement.”
— David Kemps, Executive Director
An “Equalization” of 401(k) Tax Benefits Through a Tax Credit
President-elect Biden’s retirement security proposal from his campaign calls for changes with the tax treatment of participant contributions made to a 401(k), proposing to replace tax deductions with a flat refundable tax credit. Under the current system, employers and individuals take an immediate deduction based on their contributions, and are not required to pay taxes on those contributions, and the earnings thereon, until their money is withdrawn or their benefits are paid out in retirement. However, the tax incentive for retirement savings increases not only with the size of the contribution to the plan (up to applicable limits) but also with the earnings of the participant as well, making it more attractive to those employees in the higher marginal tax brackets.
Under the Biden proposal, a single earner in the top income-tax bracket would essentially get the same tax break as a single earner in a lower-income tax bracket.5 The move aims to make retirement planning more equitable across income levels and help lower and middle-income earners put more money away for their future. On the flip side, small-business owners may have less incentive to sponsor a retirement plan for their business if the tax incentives to them for doing so are curtailed, and they may potentially look to individual savings vehicles, like Roth-style accounts, to achieve their retirement savings goals, rather than sponsoring a plan at their business.
“[Low-income earners] don’t benefit as much as someone in the 37% bracket today who is able to deduct the full amount of what they have contributed. The idea proposed by the Biden-Harris campaign is to equalize the tax treatment of retirement savings, so low-and moderate-income workers have some of the same benefit as the upper earners.”
—David Kemps, Executive Director
Providing All Workers “Automatic” Access to 401(k)
In an effort to democratize access to retirement accounts and further encourage saving, the Biden plan also calls for an “automatic 401(k),” which specifically aims to provide all workers without a pension or a 401(k), type plan the opportunity to save for retirement at work. It’s a related, though distinct, concept that is intended to work in concert with encouraging more small businesses to adopt retirement plans.
The “automatic 401(k)” proposal could involve a mandatory requirement that employers who do not offer retirement plans allow employee contributions to individual retirement accounts in the form of payroll deductions.6 Accounts may also need to be structured in a way that enables money to be rolled over automatically as employees switch jobs.7 It is possible employers could also be held responsible for facilitating state-run IRAs as another way to meet the mandates of this proposal.8
What to Expect for 2021 and Beyond
While any proposed changes introduced during the campaign would still need to move through either the legislative process, the regulatory process (if applicable), or both, before becoming law, there are a few key areas worth considering today that can help plan sponsors better prepare for and navigate a Biden administration retirement landscape:
Under more equalized retirement savings tax incentives, plan sponsors could expect to see changes in the way prospective and active participants interact and engage with a company’s 401(k) plan: more lower-income earners may feel incentivized to participate, while higher-income earners may adapt by incorporating into their overall retirement savings strategy Roth-style accounts where they can grow their money tax-free.
It is possible changes to the participant pool could create new concerns for plan sponsors around talent acquisition and retention. Employers may need to plan ahead and anticipate making adjustments to things like their compensation or overall benefits strategies to reflect the demographic shifts in participation or to retain engagement levels among its highest earners.
Plan Design and Administration.
Similarly, these changes may also spur plan sponsors to reevaluate their plan design and features to ensure they meet the needs of their participant pool. This could involve adding a Roth-like product to their plans, which may increase their administrative burden as well as the cost to maintain their retirement benefits. It could also be a good time for plan sponsors to reevaluate whether their service providers can provide the flexibility and scale they need to handle any significant shifts to participation levels or payroll processing practices.
With a few potential mandates on the horizon, it will be important for plan sponsors to make sure they are meeting all legal requirements set forth by the new administration. For example, it may be beneficial for employers currently without a plan to proactively research the logistical requirements needed to facilitate a state-level savings program, or begin to gather a list of individual retirement account providers that can help iron out possible changes to payroll practices, simplify contributions, or facilitate potential rollovers for workers who leave for a new job. Plan sponsors can expect to see the compliance landscape shift frequently, so it’s important to prepare and think about the possible groundwork ahead to avoid potential surprises or complications down the road.
Your Business Can Thrive Under Any Administration
A new administration can bring as much opportunity as it does uncertainty and change. The key to thriving lies in how well plan sponsors and businesses can adapt, adjust and readjust to an ever-evolving landscape. While it’s still too early to know for sure what exact changes are on the way, taking cues from what’s been set forth could help safeguard against potential risks to your business down the road.
Connect with us to talk to a Morgan Stanley Financial Advisor today to determine how these potential changes may impact your responsibilities as an employer, your plan or the investment opportunities available for your employees.