We’re Overruled

Richard Quinn

I BEGAN TRYING TO figure out the laws related to retirement and employee benefits after the enactment of ERISA in 1974. I spent endless hours over many years in lawyers’ offices in Washington, D.C., as each new law or regulation came along.

TEFRA, DEFRA and COBRA are but a few of the many laws that now confound Americans. I bet most people think COBRA was only about health insurance. In fact, it’s the Consolidated Omnibus Budget Reconciliation Act. When you see a D in a law’s acronym, it usually stands for deficit. Meanwhile, an R means reduction or reconciliation. Good luck with that.

Recently, HumbleDollar’s Greg Spears explained some of the new rules in the so-called SECURE 2.0 Act. When you look closely at such laws, it’s questionable whether they provide the right incentives, whether they’re administratively feasible and—most important—whether they benefit the Americans who most need help. My experience in trying to explain, comply with and administer these laws over many decades tells me the answer to these questions is almost certainly a resounding “no.”

ERISA alone added thousands of pages of regulations. It also contributed to the decline of pension plans by making them more costly to operate. SECURE 2.0 delays required minimum distributions yet again, first to age 73 and later age 75. Who but the wealthy can delay taking retirement savings until their mid-70s?

The primary beneficiaries of all this complexity are consultants and lawyers. The losers are average Americans. They’re turned off by what they can’t understand and often interpret the rules incorrectly. It can get them into a mess of trouble.

Just consider the many different retirement plans we now have: defined benefit pensions—with many variations—the 401(k), solo 401(k), 403(b), 457, SEP-IRA, traditional IRA and Roth IRA. Each one has a different set of rules and limits.

Why? There’s no need for all these variations. Some retirement and benefit laws are pushed by the wealthy, some by employers and some by unions. But doesn’t everyone have the same objective—to strengthen retirement for all workers? I doubt Congress understands human nature when it comes to money.

Writing each law in isolation, Congress has created a mishmash of benefits tied to different income levels. When compared, they don’t seem fair. You can be eligible for the saver’s credit if the family earns up to $73,000, and yet a couple would owe taxes on as much as 85% of Social Security benefit payments with a total combined family income of over $44,000.

A deductible IRA uses various income limits, partially dependent on whether a spouse has a retirement plan at work. Meanwhile, there are no income limits on Roth conversions.

In 2023, a worker can contribute up to $22,500 to their 401(k) plan, plus $7,500 more if they’re 50 or older. Yet a person relying on an IRA—without an employer match—can contribute just $6,500 this year, or $7,500 total if they’re 50 or older.

Why are Roth withdrawals excluded from the modified adjusted gross income (MAGI) calculation, while tax-free interest on municipal bonds is not? No doubt that logic got lost in the tunnels underneath the House and Senate.

How can all these disparate rules—and their associated high administrative costs—be justified? Are they necessary? Are they fair? I can’t see how. Do we really need more laws designed to motivate Americans to save for retirement? Don’t we have enough already?

What we need with retirement plans, as we do with health care, is simplification, consolidation and uniformity. How great would it be if financial education could focus on just one set of rules? The multitude of choices we have with both retirement and health care plans is not helping Americans.

Richard Quinn blogs at Before retiring in 2010, Dick was a compensation and benefits executive. Follow him on Twitter @QuinnsComments and check out his earlier articles.

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