COMMON SENSE SOLUTIONS

The 401(U)

Saving for retirement is an investment in economic security – it should be part of every family's budget, not a luxury for the wealthy. Unfortunately, our struggling economy puts this goal out of reach for too many Minnesotans. Meanwhile, our government's system for encouraging long-term savings simply doesn't work effectively. Al Franken proposes a bold new system to help families put something away for retirement – at almost no cost to the taxpayer.

There are three fundamental flaws in our current system for encouraging retirement savings.

First, it doesn't work effectively for nearly half of American workers who have no employer-sponsored retirement plan – 1.2 million workers in Minnesota.

Second, saving for retirement is far too complicated. Even when workers are given the option of joining employer-based plans, many do not take it because it is incredibly difficult to enroll, let alone to research the details of various plans and investment portfolios. And when they leave a job, they cannot take their retirement account with them.

Third, the system is upside-down and backwards. Because our current savings incentives are based on tax deductibility, a wealthy employee in the 35% tax bracket gets 35 cents for every dollar he or she saves, while an employee in the 10% bracket receives only 10 cents (and an employee who pays no taxes gets nothing). It is therefore no surprise that of the nearly $200 billion a year we spend to encourage retirement savings, about half goes to the top 10% of earners, while 10% goes to the bottom 60%.

Al Franken will propose a new account, called a 401(U), to address each of these flaws.

The 401(U):

• Universal. Every firm with more than 10 workers that does not provide a qualified pension plan would be called upon to offer universal automatic payroll-deduction retirement accounts (modeled on current IRAs) as a default for their workers. Employers would not have to sponsor any retirement plan; they would not make matching contributions; and they would not have to comply with traditional retirement plan rules. They would not manage the plan at all. They would merely deposit a portion of their employees' paychecks into standard, easy-to-open retirement accounts that would be managed and maintained by participating financial institutions. And to cover whatever administrative costs accompany these 401(U)s, employers would be given tax incentives similar to those now offered to firms that open qualified pension plans. This new savings vehicle would provide a no-hassle option to millions of workers who have no employer-sponsored retirement account. It is designed not to replace existing employer-sponsored plans, which Al Franken would seek to promote as the savings vehicles of choice, but rather to encourage more employers to move toward sponsoring an employer retirement plan.
• Automatic, portable, easy – and workers keep control. Workers would automatically have a portion of their paychecks directly deposited into their 401(U), unless they explicitly opt out. Account funds would be invested responsibly in low-cost, diverse portfolios. And 401(U)s would be fully portable. Families would be free to withdraw funds from their URA after age 65, or at any time for education expenses or the purchase of a first home. 401(U)s would also preserve autonomy and choice. Workers could opt out of the program, or any of its specifics, at any time. They could also shape their account to fit their unique needs.
• Generous. Current tax deductions for retirement savings would be replaced with a generous 30% government matching contribution that would be the same for all households. For each dollar that a worker puts into a 401(U), the government would add 30 cents, up to a contribution limit similar to IRAs. The same 30% match would apply to existing retirement savings vehicles such as 401(k)s. This matching contribution would be deposited directly into workers' retirement accounts. The result for a great number of middle class workers would be a tripling of the incentive to save. Many more workers who currently get no incentive to save – because they pay no taxes – would receive a generous incentive. (The system would be designed to ensure that workers making less than $250,000 are held harmless.)

What would it cost?
The shift from tax deductions to matching contributions is close to revenue-neutral.