The Investment Adviser Association (IAA) weighed in on a proposal from Sen. Mark Warner (D-Va) and Rep. Jim Himes (D-Conn) for a new approach on a universal and portable retirement savings account for Americans that have frequent job turnover and those who use alternative work as their primary jobs. IAA warned of possible unintended consequences of the proposal and stressed the importance of investor choice and access to different investment strategies.
PRIA proposal. The legislators’ proposal, which was published in the form of a white paper and not actual legislation, discusses the establishment of Portable Retirement and Investment Accounts (PRIAs). According to Warner and Hines, fewer workers are staying at a single employer for decades as they have in the past. The white paper also discusses “alternative work arrangements” that play an increasingly significant role in the economy, such as independent contractors, part-time workers, and gig workers.
The white paper emphasizes that PRIAs are not meant to replace 401(k)s, IRAs, and other existing retirement accounts. Instead, the PRIA plan should fill gaps in the retirement savings market that hurt workers who change jobs often or are employed in alternative work arrangements.
The white paper outlines four principles for the proposed PRIA: that it is universal, portable, simple, and smart. On the universal principle, the white paper states that every American will get a PRIA, which is created when a person is provided a social security number.
Regarding the portable principle, the white paper stresses that many Americans do not have the benefits of a workplace plan, and that a PRIA plan would follow an account that travels from job to job. Employers that do not offer a workplace retirement plan would be required to provide direct deposit of employee elective contributions to the PRIA for every worker on their payroll. “Gig economy” employers would also have to offer direct deposit to the PRIA. “As workers move among these jobs, the PRIA travels with them,” the white paper states. It would also make rolling over accounts easier, and it would not disrupt the existing retirement system.
Regarding simplicity, the white paper asserts that a new federal entity called the PRIA Board would be a “one-stop shop” for helping Americans save in a PRIA. The PRIA Board would also help savers reclaim funds from accounts they lost, such as through a company that has gone bankrupt or where the employee left sponsoring business years ago which lost track of the employee’s retirement fund.
The white paper also says the PRIA would be “smart” in that it offers two types of accounts: PRIA Basic and PRIA Choice. PRIA Basic would be the default account for every American; the PRIA Board would oversee this plan by hiring a private sector firm to develop investments and administer accounts. PRIA Choice, to which a saver can convert their PRIA Basic, would be fully administered and managed by a private financial institution.
IAA concerns. IAA’s letter advises that while it appreciates the proposal for its attempt to fill a gap in the retirement system, it implores that its authors be cognizant of possible unintended consequences of such a proposal should it be enacted into law.
IAA is concerned about the proposal would make financial institutions compete with one another not only on the basis of their fees, but also on the “desirability” of investment choices. According to IAA, this might mean that only passively-managed investment strategies would be considered for either PRIA plan. Government policies should not explicitly or implicitly favor one type of investment management over another, IAA stressed.
In the same vein, IAA urged policymakers not to assume that passive investment strategies are inherently less risky than active investment strategies, especially because risk management is a key component of many active retirement investment strategies. “Retirement policies should recognize the importance of preserving investor choice and access to a range of investments and investment strategies,” IAA concluded.