The Success of the Retirement Plan System

The private employer-sponsored retirement plan system in general, and 401(k) plans in particular, has been successful at providing retirement benefits for tens of millions of American workers.  Employer-sponsored retirement plans primarily benefit middle class families: 80% of participants in 401(k) plans make less than $100,000 per year, and 43% of participants make less than $50,000 per year.

The key factor that determines whether or not these middle class families save for retirement is if there is a retirement plan available in the workplace.  Over 70% of workers earning between $30,000 and $50,000 per year will participate in a retirement plan at work, but less than 5% will save through an IRA on their own.

While the retirement plan system works well, there are tweaks to the current rules that would enhance coverage and simplify the way employer-sponsored retirement plans operate.  ASPPA has developed a document entitled Proposals to Enhance the Private Retirement System which contains over 30 legislative proposals to improve upon the current system.  These proposals would expand employer-sponsored retirement plan coverage, and simplify retirement plan administration through modest changes to the Internal Revenue Code (IRC) and ERISA.

Retirement Plan Coverage in the Workplace

The Bureau of Labor Statistics’ (BLS) Annual National Compensation Survey found that 78% of all full-time civilian workers had access to retirement plans at work, with 83 % of them participating in these plans.  For private sector workers, BLS found the access and participation rates are 74% and 80% respectively.  Alternate research suggests these estimates are less than what is actually happening in the workplace, but regardless of what the exact percentages may be there are tens of millions of workers across the country that do not have access to an employer-sponsored retirement plan.

These stark facts are the reason why ASPPA has long supported the concept of Automatic Payroll Deduction IRAs at both the federal and state levels.  Employers implementing this arrangement would simply allow employees to use the employers’ payroll system to channel the employees’ own money into an IRA.  For most employees, payroll deductions would be made by direct deposit, similar to the common practice of depositing paychecks directly into employees’ bank accounts.  Automatic Payroll Deduction IRAs would play an important role in expanding coverage because it would make it easier for employers, particularly small businesses, to offer a retirement plan to their employees at minimal, or even no, cost.

Tax Reform

The IRC provides incentives to encourage individuals and businesses to save for retirement.  Tax incentives that power retirement savings — like 401(k) plans — are a deferral, not a permanent exclusion, like deductions for mortgage interest, or charitable contributions.  This means that for retirement savings, income deferred today will be taxable income in retirement.

In addition, the current tax incentives are a critical component in a small business owner’s decision to set up and maintain an employer-sponsored retirement plan.  For a small business owner, the ability to use tax savings on his or her contributions to generate all or part of the cash flow needed to pay contributions for other employees is an important factor in the decision to establish and maintain a retirement plan.  The current system of tax incentives for retirement savings motivates small employers to not just offer a retirement savings vehicle to all the employees in the workplace, but also to make contributions on the employees’ behalf.

Today, there are a number of proposals, from government and think tanks, which would reduce retirement savings tax incentives to raise short-term revenue.  Proposals to raise money by reducing such incentives are short-sighted, producing only short-term deficit reduction and causing serious long-term damage to the retirement security of tens of millions of working Americans.  In addition, reducing these incentives for employers literally would reduce the cash the small business owner has to work with.

Reduced incentives will mean the creation of fewer new retirement plans, the termination of retirement plans currently in operation, or lower employer contributions for the remaining retirement plans.

Definition of Fiduciary

The last time the Department of Labor (DOL) issued regulations defining an ERISA fiduciary regarding providing advice on retirement plan investments was 1975.  Given the dramatic changes to the retirement plan landscape over the last 30 years, such as the creation of 401(k) plans, it is reasonable to review these regulations.

In 2010, DOL introduced proposed regulations on this issue; however, due to serious concerns and questions, DOL decided to withdraw the proposal.  DOL is expected to re-propose these regulations in 2014 and signals from DOL suggest that all of these concerns will remain.

ASPPA actively engaged DOL recent years, through comment letters and testimony, regarding our concerns with the proposed changes.  ASPPA believes generally in providing retirement plan participants and IRA investors with the tools to make sound investment decisions — through requiring reasonable, clear, and simple disclosures of the fees and responsibilities of investment professionals — rather than prohibiting business relationships with investment professionals.

PBGC Premiums

The Pension Benefit Guaranty Corporation (PBGC) was established under ERISA to insure retirement benefits promised by private-sector defined benefit retirement plans.  There is a cap on the amount of pension benefits guaranteed by PBGC — currently over $4,900 per month, payable as lifetime income to someone who retires at age 65 — with reduced guarantees for earlier retirement ages and increased benefits at older ages.

PBGC is an independent agency not funded by general tax revenue.  Instead, PBGC collects insurance premiums from employers that sponsor defined benefit (DB) pension plans, receives funds from the pension plans it takes over, and earns money from investments.  This income covers operational expenses, as well as the unfunded portion of the liability for benefits “dumped” on PBGC by companies that go out of business, or reorganize, with underfunded retirement plans.

PBGC premiums originally were set at $1 per participant.  Since then, Congress periodically has increased this basic flat-rate premium and added an additional variable-rate charge for underfunded retirement plans.  PBGC premium rates have been significantly increased in recent years and a provision in the Bipartisan Budget Act of 2013, signed into law on Dec. 26, 2013, raises premiums even further.

For plan years beginning in 2014, all single-employer pension plans will pay a basic flat-rate premium of $49 per participant per year.  This will increase to $57 per participant in 2015 and rise even further to $64 per participant in 2016.  After 2016, PBCG flat-rate premium increases will be indexed to wage growth.  Underfunded pension plans currently pay an additional variable-rate charge of $14 per $1,000 of underfunded vested benefits.  This will increase to $24 per $1,000 in 2015, and $29 per $1,000 in 2016, subject to a cap of $500 per participant that will also be indexed to wage growth.

Supporters of these premium increases argue that PBCG has a projected deficit, and that additional premiums are needed to keep the PBGC solvent.  Although PBGC does project a deficit, at least part of that deficit is due to current low interest rates, and the deficit will shrink when interest rates rise.  Because of this, there is no consensus that the PBGC needs additional revenue.

These increases will discourage DB plan formation, particularly among small businesses that may adopt new plans but face a significant addition to annual plan administrative costs due to higher PBGC premiums.  Also, businesses with existing DB plans will be further encouraged to terminate, freeze, or “de-risk” their plans to offload the increased PBGC premium costs.  PBGC premium increases are a well that Congress is running dry.

Not only should Congress avoid further increases, but PBGC premiums should be rolled back for plans that pose little risk to PBGC, such as small plans.  In addition, PBGC premiums should be phased in for new DB plans for the same reason.