Here are 8 ways to fix the US retirement crisis:1. Consolidate retirement accounts; simplify rules
One reason saving for retirement is confusing is because there are so many different types of retirement accounts, including IRAs, 401(k)s, 403(b)s and SEP-IRAs. It can be hard to figure out whether you're eligible to contribute to a particular account and how much you can contribute.
A recent issue of Ed Slott's IRA Advisor detailed some of the confusion, noting the maximum dollar amount you can contribute to an employer-sponsored plan if you work for just one employer, in 2010: $49,000 for SEP-IRAs, profit-sharing plans and money-purchase plans. Ditto for 401(k)s and 403(b)s unless you're age 50 or older. Then it's $54,500.
The contribution limits are different for SIMPLE IRAs ($23,000, plus $5,000 for those 50 and older) and 457 plans ($16,500, plus $5,000 for those 50 and older). And if you work for more than one employer, the contribution limits change.
The PERAB report proposes that lawmakers consolidate employer-based retirement accounts and simplify eligibility and contribution rules.
"It makes a lot of sense to look for ways to consolidate different types of retirement-saving accounts, such as 401(k), 403(b), 457, and the like," said Peng Chen, chartered financial analyst and president of Ibbotson Associates, a Morningstar Company. "These plans by and large serve the same purposes, with slight differences among them."
Others, however, see it differently. "The American workplace is very diverse and the range of plan types reflects that diversity," said David Wray, president of the Profit Sharing/401(k) Council.
Wray said the proposed changes will have virtually no positive effect on retirement savings and, if not done right, could reduce the number of firms sponsoring plans, further putting in jeopardy the already precarious state of retirement security in the U.S.
"If the employer sponsors a plan, employees save," he said. "If not, employees don't save. Legislation to simplify the plan universe would have to be pursued carefully because a misstep could easily reduce plan sponsorship."
However, Wray was not unhappy with the proposal to make the contribution limits similar from plan to plan. "I do not have a problem with [that] as long as we continue to have the option for loans and hardship withdrawals," he said.
2. Integrate IRA and 401(k) contribution limits
One proposal would allow all workers irrespective of income to contribute to either or both an IRA and an employer-sponsored plan. In addition, Volcker's troupe proposed that nondeductible IRAs be eliminated since income limits on contributions would be removed.
Wray criticized this proposal, noting that "only a small percentage of lower paid workers not eligible for plan participation save in IRAs, and if they do the current IRA limits are sufficient for them."
3. Consolidate and segregate non-retirement savings
Volcker and the advisory board also called for consolidating all non-retirement savings programs, including Section 529 plans (whose rules are set by states and vary widely), Coverdell IRAs, health savings accounts, Archer medical savings accounts, and flexible savings accounts, under a single instrument. Contributions to this instrument could be tax-deductible up to a limit, as is currently the case for health savings accounts.
Somewhat surprisingly, none of our experts praised or criticized this proposal.
4. Improve savings incentives; expand auto-enrollment
The Volcker group also suggested designing the saver's credit to be more like a match, to increase its effectiveness as a savings incentive. This tax break provides a subsidy to low-income workers who make voluntary contributions to retirement plans.
At least one expert agreed that changes to the saver's credit would be beneficial. "Converting it to a match would make it more effective, both from the standpoint of encouraging more contributions and from the standpoint of getting the tax benefit into the individual's retirement account rather than his checking account," said Kaye A. Thomas, the founder of Fairmark Press Inc. "The cliffs in the current arrangement are brutally arbitrary, so a phase-out would be far better even if somewhat more complicated."
To Thomas, there's a right way to do this: Qualify people based on their previous year's income rather than their income for the year of the contribution, so that people know when they're contributing how much benefit they'll receive.
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