Continuing in our analysis and treatment of The Plan by Rahm Emanuel and Bruce Reed:
Prologue
This installment is privileged with the expertise of Jordan Curry, Financial Representative for Northwestern Mutual. The author of this blog wishes the reader to know that the blog is not sponsored by Northwestern Mutual or any other entity.
Background on Subject Matter Expert
Mr. Curry, an alumnus of Arizona State University's Carey School of Business, serves as Chair for the Board of Directors for a Denver-based travel company and actively supports multiple nonprofits, including Save Our Youth, the Pat Tillman Leadership Through Action Program and the Business School Council. He is a member of Denver Young Professionals and the Financial Planner Alliance. Mr. Curry can be reached via email Jordan.Curry@nmfn.com, or his website http://jordancurry.nmfn.com/.
Summary
With "Universal Retirement Savings," The Plan seeks to address the convergence of increasing "demands on...nest eggs" and our aging population; the decline in available pension plans and low percentage of retirement savings; and the wealth gap, by reforming the "complicated" tax code and "alphabet soup" of retirement savings plans and raising the minimum wage.
This installment acknowledges and summarizes the entirety of the initiative as stated in The Plan, but analysis focuses primarily on a single aspect having the greatest potential impact to small business: The 401 (k) requirement. In previous installments, this blog has sought to identify opportunity areas for small businesses in order to empower its readers with advantageous positions on the change curve. While it is the sincere hope of the author that reaction and discussion uncover ideas of that nature, this installment would be incomplete without addressing economic realities past and present and the considerable risks that also accompany this proposal.
To preserve context, the summary provided by the authors is restated
here in its entirety:
From now on, every job ought to come with a 401(k). An aging society cannot afford to keep saving less and risking more. We need new means to create wealth, based on the needs and responsibilties of twenty-first-century employees and employers. Employers should be required to offer 401(K)'s, and workers will be enrolled unless they choose otherwise. If they switch jobs, they can take these accounts with them. When their paycheck goes up, so will their savings. Instead of a workforce in which only half the workers have retirement savings plans, every American will have one.
"More Ownership and More Security"
One stark change since the book's publication in 2006 is a position reversal on the consequences of debt. The Plan criticizes President George W. Bush for, "dig[ging] the country still deeper into debt--an unlikely way to strengthen the nation's long-term finances," and for having "a political vision, not a practical one." In 2009, the "stimulus" plan for which President Obama has been pressing is funded by unfathomable debt and is peppered with political objectives.*
Another is public perception of the 401(k) as a dependable source of retirement income. According to a February 12, 2009, US News and World Report article (http://www.usnews.com/articles/business/retirement/2009/02/12/how-did-your-401k-really-stack-up-in-2008.html), in 2008, the average American employee lost 14 percent of her retirement savings--a $19,000 drop in average account balance.
"Americans aren't savers," says Curry. "The savings rate has historically been negative. That's a large part of the current credit crisis, and it's a result of fiscal mismanagement. Most people look at their paycheck and see a chunk of it sent to Uncle Sam for Social Security, but the reality is that personal savings is a very large part of life after retirement."
The Plan agrees: "71 million Americans work for an employer that doesn't offer a retirement plan, and another 17 million who could take part in an employer plan don't. More than half of all households have no retirement savings beyond social security." First, why don't those 17 million engage?
According to The Plan, its because "the burden of navigating and managing" plans and the sheer number of them is too bewildering. Curry disagrees, offering that having a menu of options
for savings and investment is a result of market demand for specialized services. "Problems arise," Curry offers, "when individuals aren't educated or diligent in learning about, or
managing, their retirement funds," which he admits is the realm of the professional financial advisor. "As you age, your investment portfolio should rebalance. Much of our problem right now is that this hasn't happened; people have portfolios that are in the wrong risk area."
Curry calls attention to The Plan's educational designs (previously discussed in this blog), offering that finance as a pre-college core curriculum item would provide substantial opportunity for long-term economic stability for individuals, business and the nation as a whole.
"A 401(k) with Every Job"
The Plan's proposal is to:
[R]equire all employers to offer workers a pension or 401(k), and expect all workers to contribute unless they make an affirmative step to opt out...[E]very employee would automatically be enrolled in the employer's 401(k), with the choice to opt out at any time. If employees switch jobs, they could take their account with them to a new employer. Employers could enroll each worker in their own plan, or in a state-sponsored retirement plan similar to the Thrift Savings Plan [Author's note: The TSP is currently available only to military and federal government personnel (www.tsp.gov).]
The current Obama position, available on the White House website (http://www.whitehouse.gov/agenda/seniors_and_social_security/)
states:
The Obama-Biden retirement security plan will automatically enroll workers in aThe Obama administration also plans to "ensure that all employees who have company pensions receive detailed annual disclosures about their pension fund's investments" by requiring "full disclosure of company pension investments." The Plan calls for similar transparency, and even assigns agency responsibility for enforcement. Neither Obama's position statement nor The Plan make provisions for the size of a company relative to these requirements, nor do they provide for the specifics for creating a state-sponsored savings plan accessible by the private sector.
workplace pension plan. Under their plan, employers who do not currently offer a
retirement plan will be required to enroll their employees in a direct-deposit IRA account that is compatible with existing direct-deposit payroll systems. Employees may opt-out if they choose. Experts estimate that this program will increase the savings participation rate for low and middle-income workers from its current 15 percent level to around 80 percent.
Opportunity and Risk Areas
The populist motives are clear, but questions and concerns abound for small businesses:
- Will the requirement to provide a retirement plan raise barriers to entry for my competitors?
- Will this requirement require me to employ fewer people? Or decrease
wages? Will it limit my ability to expand? - Will transparency in reporting requirements increase my payroll and overhead costs, and by how much?
- Into what actual quantitative and qualitative changes to business operations do these changes translate?
- In the market for talent, this change presents opportunity. Where? How can we seize this change for competitive advantage?
Curry's final observation on the topic is reflective of the fact that such a large majority of Americans are employed by small- to medium-sized businesses. He states, "These owners create the wealth in our society. Raising the minimum wage doesn't promote economic growth,
but economy is just one element of society." Similarly, the challenges posed for small businesses by this administration's agenda will probably provoke a reaction of discomfort and resistance.
It is this blog's hope that its readers will emerge as educated opinion leaders, with solutions at the ready.
*According to the Wall Street Journal, $500 Billion of the $6.2 Trillion Weatherization Assistance Program is for beaureaucratic "expenses;" there's $6 Trillion to help General Services Administration buildings go green; and there's even money for yacht repair (http://online.wsj.com/article/SB123379617394050229.html). The Christian Science Monitor says $300 Million has been set aside for what might be golf carts (http://features.csmonitor.com/economyrebuild/2009/02/14/my-five-favorite-things-in-the-stimulus-bill/). In fairness and if you haven't heard, they did take out the condoms (http://www.politico.com/news/stories/0109/18066.html).
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