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Senator Jeff Merkley Champions a Cheaper 401 (k) Alternative

Merkley can expect fierce opposition from mutual fund industry lobbyists to his proposed low-cost American Savings Account.

Where others before him have failed, U.S. Senator Jeff Merkley of Oregon is championing a new savings vehicle to boost retirement security for the American workforce. He joins a coterie of policymakers and think tank denizens who are concerned about the 68 million full- and part-time workers without access to an employer-sponsored pension.

Proposed in late January, Merkley’s American Savings Account Act would create a universal retirement plan for the private sector. The American Savings Account (ASA) mirrors some of the best features of the Thrift Savings Plan (TSP), considered one of the best-designed and lowest-cost defined contribution plans, which was created for federal employees, including members of Congress.

“Let’s make it simple and easy for ordinary people to take advantage of tax-preferred plans, not something that is mostly available to people in well-established businesses and well advanced in their careers,” says Merkley, the two-term Democrat from Myrtle Creek, who raised his two children in the same blue-collar neighborhood where he grew up.

ASAs would include automatic enrollment and regular contributions from employers and employees through payroll deductions. They would offer lifetime portability, require little effort from employers — other than a 3 percent annual contribution — and give participants fund rollover flexibility. In a reversal of the typical individual retirement account rollover, from a workplace plan to an IRA, ASAs would accept IRAs. What’s more, if an ASA participant took a job with a 401 (k), she could roll the ASA plan into the workplace pension, keeping the assets in one central location. As for fees, ASAs would likely follow the lead of the TSP, which includes a handful of index mutual funds charging 0.029 percent.

“We hope to build support over time that auto enrollment makes sense,” Merkley says, stressing the importance of “doing something that is very simple and not a big headache for small employers — just another check mark in enrolling people in payroll service.”

Over the past several decades, attempts to create national or state-wide retirement plans have run aground. Take the Automatic IRA, which was officially announced in 2006 at conservative think tank The Heritage Foundation by its authors, David John and J. Mark Iwry, then senior fellows at Heritage and the centrist Brookings Institution, respectively. Both John McCain and Barack Obama promoted the proposed savings plan in their 2008 presidential campaigns. Since then, though, the Auto IRA has been submitted in every federal budget without success.

In a March paper entitled “Structuring State Retirement Saving Plans: A Guide to Policy Design and Management Issues,” John, now deputy director of Washington-based Brookings’s Retirement Security Project, and project director William Gale defended the Auto IRA — and the need for new retirement plans. (John is also senior strategic adviser specializing in pensions and retirement savings at the AARP Public Policy Institute.) “Although workers without an employer-based plan can contribute to Individual Retirement Accounts, very few do,” they wrote.

Among workers who earn between $30,000 and $50,000, only about one out of 20 contributes regularly to an IRA, according to a 2006 study by the Washington-based Employee Benefit Research Institute.

Bids to create new retirement savings vehicles for the private sector have met with fierce resistance from the financial services industry. If a fund design moves out of committee and is put before Congress for a vote, lobbying efforts to kill the bill begin in force. A notable survivor is myRA, an entry-level plan created by the U.S. Department of the Treasury that consists solely of T-bills; this offering has been available since late 2015 to any American worker with an account under $15,000.

“We have long supported the goal of increasing American workers’ opportunities to save for retirement,” the Washington-based Investment Company Institute (ICI), the mutual fund industry’s lobbying group, said in a statement on ASAs. “Unfortunately, we believe that Senator Merkley’s legislation, while well intended, is premised on unrealistic assumptions about the ability to extend the inherent cost efficiencies of the Federal Thrift Savings Plan to private sector employees.” The ICI’s suggested alternative: a so-called starter 401 (k) like myRA, or other mutual fund–based plans for small investors.

The ASA bill has fans among advocates of low-cost retirement plans. David Madland, senior adviser to the American Worker Project at the Center for American Progress, a centrist think tank based in Washington, has been calling for a savings vehicle along the lines of the federal TSP. Merkley, who drew from Madland’s writings for inspiration, invited him to join the official ASA announcement. “We very much like the concept,” Madland says. “It’s clearly the right direction we need to go.”

The ASA proposal, which would amend the Employee Retirement Income Security Act of 1974, now sits with the Senate Finance Committee for review. “I think this bill has as good or better chance as any legislation,” Madland contends. But thanks to congressional deadlock, “even common-sense bills like this face an uphill battle,” he notes.

Merkley acknowledges the headwinds that come with pushing for a retirement plan that precludes established mutual fund products. “The industry that provides high-fee plans is not excited about providing low-fee options,” he says.

Visit Frances Denmark’s blog and follow her on Twitter at @francesdenmark.

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