401(k) Retirement Plans Myths - Debunked
ASPPA News from the Field
2011 Annual Conference
National Harbor, MD (October 23, 2011) In Washington, as the super committee looks to slash spending, pension professionals and actuaries gathered in National Harbor, MD for the American Society of Pension Professional and Actuaries (ASPPA) 2011 Annual Conference October 23 - 26. The buzz at the convention was over several proposals in Washington to boost tax revenue by lowering pre-tax limits and deductions in retirement plans. Common myths about retirement plans are leading law makers to propose changes that have the potential to mar the face of the retirement industry and the primary way Americans save for retirement. During the Washington Update session, Brian Graff, Executive Director for ASPPA debunked those myths.
Myth 1 – tax deductions for employer contributions and pre-tax deferrals by employees in 401(k) plans are lost revenue for the government. This is incorrect. Contributions to 401(k) plans are only tax deferred, not tax free. Therefore, the government may generate short term revenue by reducing limits, however, it is a near sighted approach at the expense of American’s retirement savings. The government would be paying themselves early and eventually see a decrease in long term revenues. Lower contributions to retirement plans equal smaller investments which see smaller market gains and equal smaller retirement distributions (and taxable amounts).
Myth 2 – less than 50% of American workers are covered by retirement plans. No. The Employees Retirement Income Security Act of 1974 that governs retirement plans was designed for full time workers, not seasonal or part time workers. In March 2011 the results of the National Compensation Survey conducted by the Bureau of Labor showed that 73% of full time American workers have access to a retirement plan and of that amount 80% of them use their plans.
Myth 3 – only the wealthy benefit from retirement plans. Not true, 74% of participants in defined contribution retirement plans (such as 401(k) plans) have family incomes below $100,000 a year. Thirty eight percent of participants earn less than $50,000 a year.
Myth 4 – 401(k) plans are inadequate. There are not enough years of experience to pass judgment. The 401(k) plan was born in 1978 but didn’t gain traction until the mid 1980’s. In retirement plan years (a lot like dog years), 401(k) plans are only teenagers. These types of plans haven’t been around long enough for workers to complete a working lifetime of savings. However, tabulations based on the EBRI/ICI 401(k) Accumulation Projection model show the replacement ratio for 401(k) plans and Social Security combined is over 100% for the lowest income quartile, and well over 80% other income quartiles.
Myth 5 – cuts to limits on retirement plans will only impact the wealthy. Wrong. The government has set forth strict nondiscrimination rules to make sure these plans provide meaningful benefits to all employees. Often times employers must make contributions to these plans for rank and file employees in order to allow highly compensated employees (those making over $110,000) to fully benefit under the plan. If highly compensated individuals (usually owners) are further limited in their benefits under these plans, benefits to rank and file could be reduced or eliminated.
Myth 6 – workers will save for retirement without a workplace retirement plan. Busted. The Employee Benefits Research Institute indicates that participation rates by moderate income workers ($30,000-$50,000) are significantly decreased without a workplace retirement plan. Less than 5% of individuals will save for retirement without a workplace retirement plan. Compared this to over 70% of individuals who will save for their golden years with a workplace retirement plan.
ASPPA members didn’t just talk, they acted. More than 550 out of the 1,500 members that attended the conference marched on Capitol Hill to help educate their local law makers. Not only did this set a new conference record but the hope is that it sets the retirement plan record straight – workplace plans are how America saves for retirement.
—J. Wayne Braun, ERPA, QPA, QKA
Manager, Actuarial and Consulting Services
People’s United Bank Retirement Services
ASPPA Member since 2003
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