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Ready for a Government-Run 401(k)?

Legislation has been introduced in the U.S. House of Representatives that would create a parallel government-run retirement savings program – and one that could undermine the 401(k), particularly for small business owners.

The Portable Retirement and Investment Act of 2018 (H.R. 6990), just introduced in the House by Rep. Jim Himes (D-CT), would establish something called a “Portable Retirement and Investment Account” (PRIA) that would be opened at birth (or whenever one files for a Social Security number). The bill provides for a $500 federal government contribution for children whose parents qualify for the Earned Income Tax Credit, and, like the defunct MyRA program, caps the initial account at $15,000 when the holder turns 18, and then provides for transfer to another PRIA.

And that’s where things start to get “complicated.”

PRIAs would be overseen by a board and a director, the latter selected by the President from among members of the board.[1. The director is to be drawn from a member of the PRIA Board which is to oversee the program – a board consisting of:

  • 3 members appointed by the Secretary of the Treasury

  • 3 members appointed by the Secretary of Labor

  • 2 members appointed by the PBGC

  • 1 member appointed by the Director of the Bureau of Consumer Financial Protection.]

The PRIA trustee will act as a fiduciary to the account “…under rules similar to those applicable to an ERISA fiduciary under section 404 of the Employee Retirement Income Security Act of 1974,” specifically that they are to discharge their duties in the sole interest of the account holder.

As for contributions – the legislation provides that any employer who permits wages to be paid by electronic funds transfer “shall” permit workers to direct a portion of their wages to their PRIA. It also allows employers to establish automatic enrollment/contributions into the PRIA. There are limits to those contributions, matching those of 401(k), 403(b) and 457 plans ($18,500 in 2018), and a provision for catch-up contributions ($6,000 in 2018). In another familiar element, employer contributions are allowed – although at this point, the bill’s reference to nondiscrimination testing is pretty vague.

Distributions from PRIAs can be rolled over without incurring taxes, if done so within 60 days – but only to another PRIA or an annuity. While PRIA balances are ineligible for rollover to qualified plans, the legislation would permit rollovers from 401(k), 403(b), 457, or 409A accounts into PRIAs.

Speaking of distributions, at a participant level, the rules that apply to ERISA qualified plans are mirrored here; counted as gross income (and taxed accordingly), 10% penalty applied if distribution occurs before age 59½, exceptions for distributions made on account of disability or unemployment after age 55. Loans are permitted, subject to the same basic rules on repayment and taxation that apply to qualified plans.

One might well wonder why the congressman would feel the need to construct a parallel (and largely identical) alternative to the current private retirement system. And then you realize that the legislation calls on the PRIA director to, “each year on a competitive basis,” award a contract to “an entity” in the private sector to act as trustee of all portable retirement and investment accounts, and that each PRIA is to be invested in a lifecycle fund provided by the trustee.

The Board is directed to manage the fund in the same manner as the federal government’s Thrift Savings Fund.

In essence, the bill constructs a single-provider system established and overseen by the federal government, one that in other respects seems designed not only to replicate many of the key aspects of the private sector’s current system – except that when it comes to rollovers, it’s a one-way street.

Or, as American Retirement Association CEO Brian Graff explains it, “This is yet another example of a member of Congress thinking that the government always does it better. It’s particularly galling to introduce this while they are finally close to getting open MEPs enacted. Could they at least give that a chance first!”