Could Retirement Reform Cost Employers?

As Social Security becomes a fading backstop of the past, baby boomers and the even younger generations have come to rely heavily on 401(k) savings accounts as a tool to save for retirement. Social Security was once a substantial supplement to most retirees, but living expenses have outstripped Social Security payouts, taxpayers are forced to rely on different strategies for savings.

Robert Reynolds, Chief Executive of Putnam Investments, along with various other industry insiders and policymakers, are calling for broad retirement-savings reform. Reynolds says that, based on the 401(k)’s dominance as the primary retirement-savings tool, and the fact that, according to the Wall Street Journal, American workers lost $2 trillion in last year’s market downturns, the 401(k) has shown “holes,” and stands to be greatly improved.

So far, the reform sounds like great news to “the more than 75 million Americans, roughly half of the total workforce, who have no access to any workplace retirement plan.” Yet, one of the key proposed changes is likely scaring the business owners that have had to purposely eliminate their matching retirement plans because they simply couldn’t afford it:

President Obama’s 2010 budget calls for the future establishment of a program in which all workers would be automatically enrolled in employers’ retirement plans. Now, in most cases, they must opt in to participate. Also under the administration’s plan, employers that don’t offer a retirement plan would be required to enroll their employees in a direct-deposit individual retirement account. Employees would be able to opt out of either approach.

When given the opportunity to build a nest egg, our inclination is that only a small minority will choose to opt out of saving programs. Reynolds has said that tax incentives will be provided to both workers and employers who participate. However, will these tax incentives be enough to cover employer costs?

Click here to view an outline of the proposed changes that Robert Reynolds presented to colleges yesterday in Washington, D.C.

Our guess is that the retirement reforms outlined by Mr. Reynolds are likely to be enacted in some form or the other, due to the rapidly declining state of the nation’s Social Security program. “Projected long run program costs are not sustainable under current financing arrangements. Social Security’s current annual surpluses of tax income over expenditures will begin to decline in 2011 and then turn into rapidly growing deficits as the baby boom generation retires. Medicare’s financial status is even worse.”

What about the steadily improving stock markets? If markets return back to substantial levels, perhaps that will nix the discussion? Ross Kerber of Rueters wrote yesterday, “Don’t count on improving stock markets to slow momentum for rule changes to 401(k) retirement plans.”

We’ll keep you posted as this discussion intensifies in Washington.

Click here to estimate your retirement savings.