The retirement provisions in the Democrats’ Build Back Better legislation could create the biggest influx of plans and participants in the history of the retirement industry, industry leader Brian Graff believes.
Graff, CEO of the ARA and Executive Director of NAPA, made his remarks at the opening session of this year’s NAPA 401(k) Summit in Las Vegas Sept. 12. Focusing on the problem of access to a workplace retirement plan—and the disparate impact of that problem on minority workers—he recapped the BBB retirement provisions that were approved by the House Ways & Means Committee on Sept. 9 and shared his perspective on their potential impact on retirement savers, employers and 401(k) advisors.
Closing the Savings Gap
The key to helping American workers who are not on track to retire with the savings they’ll need in retirement, especially black and Hispanic workers, is boosting plan participation. Citing data from the Urban Institute, Graff noted that 52% of black workers and 68% of Hispanic workers lack access to a retirement plan; by comparison, only 40% of white workers do. In plans with auto-enrollment, however, there is no racial disparity in retirement savings participation, with black, Hispanic and white Americans all at 80%. “If there are no racial differences, we can eliminate the racial gap in savings by just getting more people into a plan,” Graff said.
From a public policy perspective, he explained, the situation is analogous to the situation regarding access to health care a decade ago, with the government stepping in to remedy the problem. This is driving the spread of state auto-IRA programs—as well as their success, Graff pointed out. Citing the OregonSaves auto-IRA program, he noted that $120 million in assets have flowed into the plan since 2018. And employers ssem to like these programs:
- 86% of small and midsized employers (between 5 and 250 employees) without plans support the concept; and
- most employers (for example, 78.5% in Oregon) report no out-of-pocket costs.
Moreover, the programs don’t dissuade new plan adoption. In 2019, California and Oregon had some of the highest proportions of new plan adoption, Graff noted. “In fact, advisors in California and Oregon are seeing a pickup in new plan interest now that they must have a plan of some kind,” he noted.
With the BBB retirement provisions, Graff explained, we’re now seeing the federal government developing similar public policy on a national level, focusing on the power of auto-enrollment and auto-escalation. All this focus on government retirement programs and mandates at the state level, and now the federal level, means one thing, Graff believes: “It’s no longer a question of if; it’s a question of when.”
In terms of the role of the retirement industry, Graff pointed out that currently, government entities’ approach “is to work with us.” But that could change, he added; it’s now clear that the access and coverage problems will be addressed one way or the other. The question “is whether it will be done with us or to us.”
What’s in the BBB Bill?
Title B of the BBB legislation would require most employers that currently do not offer access to a retirement plan to begin automatically enrolling their employees in IRAs or 401(k)-type plans, effective Jan. 1, 2023. The automatic contribution percentage would start at 6% for qualified employees and would auto-escalate up to 10% during the fifth plan year and thereafter. In addition to the auto-enroll IRA and 402(k) vehicles, the legislation also establishes a new type of deferral-only 401(k) plan, which Graff termed a “Super SIMPLE.”
Title B also significantly improves the existing tax credit for qualified plan startup costs, Graff noted—the current $5,000 credit would be increased to 100% for small employers (25 employees or less) and cover start-up expenses (including advisor fees) for 5 years. And an employer with a deferral-only 401(k) would get a $1,000 credit for 3 years regardless of expenses and $500 for the fourth year.
The Potential Impact
Citing data from EBRI and Quantria Strategies, Graff explained outlined the impacts the auto features and start-up credit could have:
- more than 62 million new retirement savers, including 7 million new black savers and nearly 11 million new Hispanic savers;
- $7 trillion in additional retirement savings over 10 years; and
- 625,000 new plan sponsors, with a median workforce of 15 workers.
Referring to the estimated number of new plan sponsors, Graff termed that “the greatest new lead opportunity in the history of our industry.”
Will the Title B provisions be enacted into law? “Of course I don’t know the answer” to that question, Graff said. “It’s Washington—I don’t know what going to happen tomorrow in Washington, much less weeks from now. But it all depends on reconciliation” (the congressional budget process that circumvents a standard majority vote to approve). “Things are tense in DC right now,” he noted. Graff does expect that some version of the BBB bill will be passed via reconciliation because the political stakes are so high for Hill Democrats. “It won’t be $3.5 trillion, though; it will be something less than that,” he said. And the likelihood that the Title B retirement provisions will be included in the final version? “I’d say there’s a 75% probability of it being in the bill,” he said.