Noting that “many employers would like to offer a 401(k), but the private market doesn’t offer low-cost, hassle-free options,” Democratic candidate for President (and current South Bend, IN mayor) Pete Buttigieg has unveiled a “Public Option 401(k).”
According to a 19-page white paper issued by Buttigieg’s campaign, every worker who chooses to opt in to the Public Option 401(k) will have two accounts: a Rainy Day Account and a Retirement Account, and under what it calls the “baseline savings plan,” a worker could opt in to contributing 1.5% of their pay into their Rainy Day Account – and that would trigger an employer contribution of 3% of pay into the worker’s Retirement Account.
It says that workers “can make extra contributions to either account, dial down their contributions, or opt out at any time” – no word on how that might affect the “triggered” employer contribution.
The plan calls for those retirement account dollars to be defaulted into lifecycle index funds (though workers who want something else will have access to “other low-cost, safe options” as well). Those funds will carry “extremely low fees,” according to the white paper. Indeed, their fees will be “required by law to be nearly zero, like those in the Thrift Savings Plan,” according to the paper.
There’s apparently no automatic enrollment into the Public Option 401(k), but its authors are betting on two aspects to “help ensure high rates of opting in.” First, employees’ baseline contributions go into the Rainy Day Account where they are “always accessible” – “workers do not tie up a dime of their own pay,” according to the proposal.
Secondly, there’s that “generous” (and apparently mandatory) employer match. Oh, and the proposal pitches this as an attractive option for employers as an “easy-to-use, off-the-shelf product to offer employees” where they need only “go to a website, click a few buttons, and start contributing to the worker’s Public Option 401(k) via bank transfers or their payroll provider, just like direct deposits of workers’ wages.”
The proposal’s separation of “Rainy Day Accounts” from Retirement Account means that its proponents can tout the ability to tap those funds “at any time, for any reason, and with absolutely no penalty, even before retirement,” while setting aside Retirement Account funds for “old age, unless a safety valve is triggered – for emergencies like disability, unemployment, or family medical emergencies, or for major life expenses like a house down payment or educational expenses.” Now, that sounds like your standard hardship conditions, but the proposal says that “limits on safety valve withdrawals will vary by income and will be capped for high earners…”.
And, according to the campaign, the Public Option 401(k)’s Retirement Account will have “all the tax benefits of a 401(k), either traditional or Roth.”
Impact on Existing Plans
For those wondering how this proposal affects those who already have a plan, Buttigieg notes that employers will be exempt from the requirement to offer the Public Option 401(k) if they offer a defined benefit pension or a 401(k) or similar account “with a sizeable employer match or otherwise successful and generous retirement package instead.” No, neither sizeable, successful nor generous are defined, though it does claim that “guardrails” (such as a special maximum contribution limit in the Public Option 401(k) like in current SIMPLE plans) will “further protect” current 401(k) plans.
However, the proposal may offer a preview of where this is going. It explains that the employer match under the Public Option 401(k) is “generous” – noting that “whereas current employers tend to contribute only seventy cents for each dollar of employee 401(k) contribution, employers under the Public Option 401(k) will contribute two dollars.”
Note that this “Public Option 401(k)” will first be available at large employers, while it is “building toward a seamless, streamlined, hassle-free system for medium and eventually smaller employers.”
Oh – and workers can not only take their Public Option 401(k)s with them from job to job and retain their opt-in choice from a previous job, they would also be able to “seamlessly roll their prior 401(k)s into the Public Option 401(k) when they switch jobs…”.
“Apparently, Mayor Pete is subscribing to the view of many of his other Democratic presidential candidate colleagues that the government always does it better,” notes Brian Graff, CEO of the American Retirement Association.
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