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 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!”

Footnote

  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.

Add Your Comments

4 Comments

  1. stephens61
    Posted October 3, 2018 at 11:02 am | Permalink

    I am fairly certain we tried a government ran retirement plan during the FDR administration called social security. That hasn’t worked out so well.

  2. Michael
    Posted October 3, 2018 at 11:28 am | Permalink

    History has shown that putting the wealth of the people into a governments hands never turns out well. You never know how the government’s policies are being expressed through the portfolio. One could argue that the Social Security fund was invested in the Federal Government and it got bigger. The express intentions of this proposed legislation is additional retirement security. The trick will be to support the notion without supporting bad policy. This is really bad policy.

  3. Roger Chandler
    Posted October 3, 2018 at 11:54 am | Permalink

    How clueless can you be. The MEP will solve many of these problems and be run by experts in the retirement industry. This is like overlaying a concrete Interstate Highway with asphalt.

    Bidding for a private entity to hold the funds and run the program each year is proof this hack has no idea what is involved in moving assets and period participant account balance from one record keeper to another. What a great idea, let’s have a blackout period every year.

    The President of the United States would pick the Director? Seriously.

  4. John Ortman
    Posted October 5, 2018 at 9:15 am | Permalink

    Please note that several comments on this post have been removed because they violated our standard regarding appropriate discourse. While this website was created for and by retirement plan advisors — first and foremost, those who members of NAPA — it is accessible to everyone. That is because we believe in the value of informed and robust discussions of the issues facing all professionals serving sponsors of and participants in workplace retirement plans. However, comments which are characterized by vitriol or by ad hominem attacks, including ones that fall into the realm of politics, do not contribute to an informed discussion but rather detract from it, and as such will be removed. Thanks for your understanding. — John Ortman, Editorial Director

Post a Comment

Your email is never published nor shared. Required fields are marked *

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <s> <strike> <strong>

Send this to a friend