401(k) Plans Could Be Altered Under Proposed Laws

Summary

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WSJ Your Money Briefing | 401(k) Plans Could Be Altered Under Proposed Laws

Host: J.R. Whalen | Guest: Ann Tergeson (WSJ Reporter)
Date: July 18, 2018

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Episode Overview

This episode of Your Money Briefing focuses on pending legislation in Congress that could bring the biggest changes to retirement savings plans—including 401(k)s—in over a decade. Wall Street Journal reporter Ann Tergeson joins to explain key proposals that aim to help small businesses offer retirement plans, encourage lifetime income options like annuities, and introduce new ways for taxpayers to save their refunds. The discussion is timely given the political uncertainty of an election year and the challenges of navigating bipartisan support in a busy legislative session.

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Key Discussion Points & Insights

1. Proposed Legislative Changes to Retirement Savings ([03:09])

• Multiple Employer Plans (MEPs):
  • Small businesses could join forces to offer a single, joint 401(k) plan, reducing both administrative costs and complexity.
  • MEPs allow companies with few employees to achieve the cost advantages of larger firms, making it easier for small businesses to provide retirement benefits.
  • Quote:
    "A current problem for small employers is if they only have eight or 10 employees or 20 employees, those employees are going to pay much higher administrative costs than sort of a company with hundreds of employees would. So this allows these small employers to get these economies of scale that bigger plans can realize."
    — Ann Tergeson [03:09]

2. Expanding Annuity Options in 401(k) Plans ([04:12])

• Encouragement of Annuities:
  • Legislation seeks to make it easier for 401(k) plan sponsors to include annuities, providing workers with a guaranteed lifetime income option.
  • Legal barriers have made employers hesitant to offer annuities, due to fear of liability if the insurer fails.
  • The new bill would offer a "safe harbor" provision, protecting employers from legal risk if they follow defined procedures in selecting insurers.
  • Quote:
    "Employers are concerned that if they choose an insurer to provide an annuity and something happens... that there's potential legal liability for the employer. So what employers have been waiting for is some kind of what they call a safe harbor..."
    — Ann Tergeson [04:18]

3. New Hopes for Saving Tax Refunds via Behavioral Economics ([05:18])

• "Save My Refund" Proposal:
  • A separate bill proposes adding an option to tax forms allowing filers to directly divert a portion of their refund into savings upon filing.
  • The aim is to harness behavioral economics, letting people commit to saving money in the future—when they’re more likely to do so—rather than immediately.
  • Quote:
    "It's very easy to commit to doing something that's in your best interest that's good for you tomorrow."
    — Ann Tergeson [05:26]
  • Memorable Moment:
    • J.R. Whalen joking about workplace temptations:
      "Like when somebody brings in a piece of cake into work, I'll start my diet on Monday."
      — J.R. Whalen [06:22]
    • Ann Tergeson:
      "Exactly. And so it turns out that that works with savings, too, that people are much more likely to commit to saving in the future than they are today."
      — Ann Tergeson [06:25]

4. Political Uncertainty and Path Forward ([06:49])

• Congressional Prospects:
  • The outcome of these proposals is uncertain, especially with Congress’s compressed schedule in an election year.
  • Senate support appears solid, while the House remains a question mark, particularly among Republicans prioritizing emergency savings as a key campaign issue.
  • Quote:
    "It's just difficult to kind of handicap what they will do. I mean, you know, in the Senate in particular is facing Supreme Court nominee hearings and you know, this is an election year, there's a compressed calendar, so it's hard to know."
    — Ann Tergeson [07:07]

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Additional Resources

• Listeners are encouraged to check out the in-depth article by Ann Tergeson and WSJ tax reporter Richard Rubin on WSJ.com for a comprehensive overview of the legislation [07:42].

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Notable Quotes & Memorable Moments

• On Small Employers’ Struggles:
  "Currently a problem for small employers is that costs a lot of money. It's complex for them to set up these plans. So if they band together and do this and sort of outsource it... all the administration and the setup, it takes up less of their time."
  — Ann Tergeson [03:09]

• On Behavioral Saving:
  "This provision says, you know, people can choose in April to commit to save when the refunds come due, which is, you know, not immediately, but in the future. So they can't sort of mentally spend that money."
  — Ann Tergeson [06:25]

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Timestamps for Important Segments

• 03:09 – Introduction to multiple employer plans (MEPs) for small business 401(k)s
• 04:12 – Legislative provisions for including annuities in 401(k)s
• 05:18 – Behavioral economics and saving tax refunds via opt-in at tax filing
• 06:49 – Congressional outlook and political hurdles
• 07:42 – Reference to further reading and article plug

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This summary captures the key themes, insights, and developments from the episode, making it easy for listeners to understand what's at stake for retirement savings—and what to watch as these proposals develop in Congress.

Transcript

[Small Business Owner]

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[Small Business Owner]

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[J.R. Whalen]

I'm J.R. whelan in New York. There's a raft of legislation being considered by Congress that could significantly change retirement accounts and 401ks. We'll have details in a moment. First, These money headlines US automobile dealers expect foreign cars to cost nearly $6,000 more if you if President Trump's threatened 25% tariff on imported cars goes into effect and some dealers have begun stockpiling foreign built vehicles based on worries they could be more expensive to order from overseas, President Trump has repeatedly taken aim at foreign and domestic automakers in his efforts to pressure companies to expand US Manufacturing jobs. If the tariffs do become reality, Mazda and Mitsubishi are expected to be hurt more than many other foreign brands because they are 100% reliant on imports to stock US dealer lots and typically sell to price sensitive buyers. Meanwhile, investors are growing more cautious on the global growth story. For the first time since the China inspired market turmoil of early 2016, a clear majority of the fund managers surveyed by bank of America Merrill lynch don't expect global growth to accelerate over the next 12 months. Confidence in global economic growth propelled markets through the last year and supported key benchmarks into 2018. Despite concerns over trade and wider geopolitics. And as President Trump considers a possible emergency release of stockpiled oil from the 660 million barrel Strategic Petroleum Reserve. If new supplies can't provide another sharp rise in prices, the Wall Street Journal heard on the street team argues it would be ill advised. The reserve was conceived at a time of gas lines and severe economic challenges. Plus, the last three drawdowns have come in the wake of armed conflict in the Middle east and in 2011, a devastating hurricane that knocked out 1/4 of US production. The hurt on the street team argues the economy is booming, the stock market is near a record, and consumers are confidently snapping up SUVs. Shaving a dollar or two off the cost of a fill up isn't why the reserve was established. Each barrel used for that purpose, they say, is one that won't be available in a legitimate emergency. This is your money briefing from the Wall Street Journal. Welcome back, everybody. The biggest legislative changes in a decade could be coming to retirement savings, including 401 accounts, if enough members of Congress get on board. And wa. Wall Street Journal reporter Ann Tergeson is here with details. So, Ann, there are many changes being considered. One would encourage small businesses to offer retirement savings plans. How would it do that?

[Ann Tergeson]

Well, there's a couple different measures in this, this one bill that's sort of likely to serve as a basis for something that Congress does. But the, the, probably the, the one that's being talked about most is something called multiple employer plans. And what, what it does is it allows small companies to band together to offer their employees sort of one joint 401k plan. Currently a problem for small employers is that costs a lot of money. It's complex for them to set up these plans. So if they band together and do this and sort of outsource it to a financial services company, all the administration and the setup, it takes up less of their time. It's more efficient. It's also less cost because there's more participants in the plan. A current problem for small employers is if they only have eight or 10 employees or 20 employees, those employees are going to pay much higher administrative costs than sort of a company with hundreds of employees would. So this allows these small employers to get these economies of scale that bigger plans can realize.

[J.R. Whalen]

And the proposed legislation would also encourage 401 type plans to offer annuities. Can you explain what that means when

[Ann Tergeson]

you think about a defined benefit pension plan, a traditional pension plan annuitization was a big feature of those plans. In other words, you would retire and instead of walking off with some large lump sum, you would walk away with a monthly income that was guaranteed for life. So there's been a big movement in the 401 world over the years to sort of try to replicate a lot of the features of those old fashioned pension plans. One that is an obvious one is annuitization. But that hasn't happened largely for legal reasons. Employers are concerned that if they choose an insurer to provide an annuity and something happens and the insurer is no longer able to make the payments as promised, that there's potential legal liability for the employer. So what employers have been waiting for is some kind of what they call a safe harbor from either regulators or from Congress. Sort of saying like if you do A, B and C, then you will not face legal risk when you select an insurer, and this legislation would do that.

[J.R. Whalen]

There's another characteristic here. People would also have a way to put away tax refunds as savings even before the IRS issues the refund.

[Ann Tergeson]

Okay, well, that's a separate bill as well, which may or may may not make its way into anything that Congress passes. And again, with the big caveat that it's hard to predict whether Congress will actually pass anything. That is the big question looming over all of this. But there was another bill introduced in the Senate this morning by a bipartisan group of senators that would include that feature which would allow, say, me, when I file my income tax return, my 1040, there would be a box that I could check off saying, you know, would you like to save a portion of any refund that you're due? So it's using behavioral economic principles to get people to commit ahead of time to saving. What these behavioral economists find is that, is that people. It's sort of like when you're thinking to yourself, you know what, I'm not going to go on a diet today because I really want to eat those cookies, but tomorrow I will go on a diet. It's very easy to commit to doing something that's in your best interest that's good for you tomorrow.

[J.R. Whalen]

Like when somebody brings in a piece of cake into work, I'll start my diet on Monday.

[Ann Tergeson]

Exactly. And so it turns out that that works with savings, too, that people are much more likely to commit to saving in the future than they are today. So this provision says, you know, people can choose in April to commit to save when the refunds come due, which is, you know, not immediately, but in the future. So they can't sort of mentally spend that money.

[J.R. Whalen]

And as you mentioned, you never know what's going to happen on Capitol Hill in terms of this legislation going through and becoming law. It's an election year, so you never know. That's sort of the wild card. But House Republicans have said they'd like to make emergency savings a hallmark of the reelection campaign. So there is a, there is a bit of support there. We just don't know how far it's going to go.

[Ann Tergeson]

Yeah, I think the House Republicans are probably the bigger question mark in the reporting that I've done. It sounds like the Senate would probably pass this one bill that's sort of the basis for a lot of these provisions pretty easily and quickly. The question is really, what is the House going to do? And in the article, my colleague in Washington lays out some of the things that people in the House are talking about, but it's just difficult to kind of handicap what they will do. I mean, you know, in the Senate in particular is facing Supreme Court nominee hearings and you know, this is an election year, there's a compressed calendar, so

[J.R. Whalen]

it's hard to know a lot for Congress to tackle. Definitely check out the article by Ann Tergeson and Wall Street Journal tax reporter Richard Rubin on WSJ.com and that is Anne Tergerson here in our studio. Ann, thanks for being with us.

[Ann Tergeson]

You're welcome.

[J.R. Whalen]

And that's your money briefing. I'm JR Whalen in New York for the Wall Street Journal.

[Small Business Owner]

Access to affordable credit helps me pay my employees, but I don't really need it.

[Advocate for Durbin Marshall Bill]

Inflation is killing me, but who cares? Big retailers are making record profits. That's why we support the Durbin Marshall credit card bill.

[Small Business Owner]

See, banks and credit unions help small businesses make payroll. This bill would cut the vital resources

[Advocate for Durbin Marshall Bill]

they need while increasing megastore profits. They deserve it, don't they?

[Small Business Owner]

Tell Congress stop the Durbin Marshall money grab for corporate megastores paid for by the Electronic Payments Coalition.