The Department of Labor is pushing through a proposal for mandatory state-run retirement accounts before Obama leaves office
The Obama Administration is rushing through plans for a mandatory system of government-run retirement accounts before the 2017 change in Washington. The Department of Labor (DOL) proposed new regulations last November that would mandate states set up automatic enrollment for any employees not enrolled in an employer-sponsored plan.
The DOL stopped taking comments on the proposal January 19th and is expected to push it through quickly before the end of the year. Congress has rejected similar proposals twice before but the new orders will sidestep congressional oversight to go straight to a Presidential signature.
The American Retirement Gap and Automatic Enrollment
With the slow death of defined-benefit pension plans, many Americans are facing a retirement crisis. More than 68 million workers are not covered by an employer-sponsored plan and less than 10% of them have set up an IRA of their own. A recent report by BlackRock found that the average retirement savings of $136,200 would provide just $9,129 annually for retirees.
We clearly need a solution to the coming retirement crisis but there are a number of flaws in the state-led, mandatory model that could cause major problems. The proposal by the DOL revokes several safeguards for investors under the Employee Retirement Income Security Act of 1974. The rules, to which state plans won’t have to comply, protect investors from conflicts of interest in the plans and fees charged by plan administrators.
Not requiring the rules and safeguards in state mandatory programs will put private-sector 401k programs at a cost disadvantage and we’ll see the same trend to employers dropping coverage as we’ve seen in Obamacare. Last year saw 18 states discussing mandatory retirement enrollment with four states (Illinois, Oregon, Washington and California) already passing state-run programs.
What Automatic Retirement Enrollment Means to You
Even if you are already enrolled in an employer-sponsored retirement program or have your own self-directed IRA accounts, the automatic retirement enrollment could have far-reaching consequences on the economy and on your plans.
While universal healthcare is a right of all Americans, the Obamacare program has been horrendously managed. A report by the Department of Health & Human Services found $3 billion in improper payments last year, concluding that, “the internal control deficiencies that we identified limited [the Centers for Medicare and Medicaid Services] CMS ability to make accurate payments.”
Not only has Obamacare automatic enrollment been poorly managed but many employers have elected to drop health insurance programs for their employees, pushing their workers to a poorly conceived program that often costs more per month.
What happens to the financial well-being and retirement plans of tens of millions of workers when employers start dropping 401k plans in favor of the government model? Many local governments have been unable to manage their own busting deficits and retirement pension systems. What happens when these same politicians are managing the retirement of a hundred million private-sector workers?
What happens to the economy when those private-sector workers find their automatically-enrolled retirement savings mismanaged and need to rely on public assistance like Medicaid?
If you are not already covered by an employer-sponsored retirement program, it is critical that you open an individual retirement account (IRA) before you are automatically enrolled in a state program. IRA investments give you more flexibility compared to 401k programs and you control the money in the account. Some IRA accounts will even give you checkbook control.
Even if you are covered by an employer-sponsored 401k, understand the differences between a 401k vs IRA to take advantage of the opportunities in an individual account. As we have seen in Obamacare automatic enrollment, you may be forced out of your 401k program onto a state-led retirement program so it’s best to know your options ahead of time.