Letter of the Law | Published in April 1999

Wanted: A Plan That Sponsors Can Live With

Portman-Cardin's route to more responsive, less mind-numbing employer-sponsored plans

By PS | April 1999

Portman-Cardin's route to more responsive, less mind-numbing employer-sponsored plans

Rep. Rob Portman
US House of Representatives

With Americans living longer and 76 million baby boomers beginning to retire in 15 short years, solving Social Security's fiscal problems has properly become a top priority for the president and the Congress. But the spotlight on Social Security also has dramatized the need to look more broadly at the overall issue of retirement security.

Fed Chairman Alan Greenspan said it well in recent testimony before the House Ways and Means Committee. "We tend to focus on Social Security as though it is independent of the overall means of retirement incomes for the population as a whole," he said. "We are going to have to increase the aggregate amount of resources for our retirement population because it is becoming so large, and the presumption that it can all be figured through the public Social Security system, I think, is a mistake."

We must take steps to preserve the long-term solvency of Social Security. But Social Security was never intended to meet all the financial needs of retirement and, for most Americans, it does not. Instead, it is just one leg of a three-legged stool that supports Americans in their post-working years. The other two are personal savings and tax-favored, employer retirement plans.

In the past several years, Congress has attempted with some success to encourage personal savings--e.g., through the popular Roth IRAs. We also have begun to reverse the trend of the past two decades by starting to simplify the laws governing private pension plans. But there is much more that can and should be done to help the American people meet the challenge of providing for their own retirement.

A typical senior relies on a pension for almost 20% of her retirement income. And, these plans make sense for our diverse and changing workforce. They are flexible enough to adapt to the needs of employers of all sizes, and workers like both the flexibility and the security that comes from having their own accounts.

Pension savings are also good for the economy. Because they are prefunded, or already paid for, they create a large pool of savings, making investment possible and enhancing economic growth. And, in part, because of the automatic withdrawal from paychecks that is typical of these plans, they create new sources of savings that would not otherwise be in the economy.

Economists from across the ideological spectrum agree that enhancing personal savings is key to long-term economic growth and prosperity. Yet this vital component of retirement security needs help. We have all heard that the overall US savings rate for individuals is now hovering at historically low levels. The Department of Commerce recently published the first negative personal savings rate since 1933. Baby boomers, in particular, are not saving nearly what they will need for a comfortable retirement. Meanwhile many businesses, particularly smaller companies where most of the new jobs are being created, are not offering retirement plans due to the costs, complexity, and liabilities.

Since 1982, as increasing layers of restrictions and regulations have been imposed on pensions, defined benefit plans have practically ceased to exist in the small employer market, and coverage under pension plans in general has not expanded. The Department of Labor reports that only half of all workers have pension coverage, and statistics from the Employee Benefit Research Institute show that, of businesses with 25 or fewer employees, only 20% now offer any kind of pension plan. Today's workers are not saving enough in part because pension coverage is inadequate.

Congress can act now--on a bipartisan basis--to increase retirement security by enacting a comprehensive reform of outdated pension laws. That is why Congressman Ben Cardin (D-Maryland) and I have proposed legislation that provides the most significant expansion and reform of pension laws in a generation(see "Will Congress finally slash the red tape?" Plan Sponsor, December/January 1999). Among its key provisions:

For workers:

  • Increased contribution limits: Over the last 20 years, Congress has lowered the annual dollar limits on contributions workers can make and benefits they can accrue. Portman-Cardin substantially increases the limits for all types of plans and repeals the current 25% of compensation limit on contributions to defined contribution plans.
  • Catch-up contributions: Portman-Cardin increases the limits on all employee contributions by $5,000 for workers 50 and older so that they can "catch up" for years when they were not employed, did not contribute to their plan, or otherwise weren't able to save. In particular, this will benefit women who have returned to the workforce after taking time away to raise families.
  • Roth 401(k): Portman-Cardin includes new "Roth" 401(k)s and 403(b)s, similar to the popular new Roth IRAs. With these savings plans, workers contributions are not deductible as they would be normally, but the benefits paid in retirement would be tax-free.
For small business:
  • The bill would simplify the burdensome "top-heavy" rules in numerous ways, such as permitting an employee's elective contributions not to be taken into account in determining whether a plan is top-heavy.
  • IRS fees: Today, the IRS charges a business a "user fee" when the business requests a determination letter that its retirement plan is qualified under the tax laws. Portman-Cardin would eliminate this user fee for small businesses.
  • Salary-reduction-only SIMPLEs: In 1996, under legislation authored by the two of us, Congress made available to small businesses the SIMPLE plan, which is exempt from many of the burdensome requirements applicable to other plans. The new Portman-Cardin bill would substantially expand the SIMPLE plan by permitting salary-reduction-only SIMPLE plans. These plans can be used particularly by start-up small businesses in order to enable employees to save for their own retirement.
For a mobile workforce:
  • The average worker will hold nine jobs by the age of 32, and workers typically do not stay in any job for more than five years until age 40. Portman-Cardin includes portability provisions to allow workers who are changing jobs to roll over retirement savings between different types of plans, including qualified plans such as 401(k) plans, Section 403(b) arrangements, and Section 457 plans.
  • In many situations, the "same desk rule" prevents workers who move to a new employer from consolidating their retirement savings in their new employer's plan. Portman-Cardin would repeal this inappropriate restriction on portability.
  • Faster vesting: Under current law, many employees do not become fully vested in a pension plan until they have been with an employer for five years. Portman-Cardin would lower the vesting requirement for matching contributions to three years.
To make pensions more secure:
  • Repeal the "full-funding" limitation and reform other pension funding rules: Over the last 15 years, numerous laws have restricted employers' abilities to contribute sufficient amounts to defined benefit plans. These restrictions can undermine the security of employees' pensions and create significant burdens for employers. Portman-Cardin would eliminate the unnecessary funding restrictions.
  • Portman-Cardin would also require improved disclosure when future pension benefits are reduced, including in the context of a conversion from a traditional defined benefit pension plan to a cash balance plan.

Cutting red tape:

  • Portman-Cardin would remove barriers that discourage businesses from offering plans by eliminating burdensome mathematical tests (such as the so-called multiple use test) and make other tests (such as the separate line of business test) simpler to administer.
  • Under Portman-Cardin, if an employer inadvertently fails to comply with one of the countless retirement plan requirements, but later corrects that failure, there would be no sanction or, in cases where the Internal Revenue Service can impose a sanction, it would have to be fair and reasonable.
  • Help for ESOPs: Portman-Cardin eliminates the savings disincentive in present law with respect to ESOPs by allowing ESOP dividends to be retained in the plan without the loss of the dividend deduction.
  • Clarify tax treatment of 457 plan benefits: Portman-Cardin contains a number of provisions that would provide greater clarity and flexibility regarding the timing and form of benefits under retirement plans in the public and tax-exempt sectors.

As Congress continues to grapple with ways to preserve Social Security for the 21st century, we cannot afford to pass up the opportunity to expand the employer-provided pension system as well. If enacted, these needed changes will expand savings and make the difference between retirement subsistence and retirement security for millions of Americans.

US Representative Rob Portman is a Republican representing Ohio's Second Congressional District, centered on Cincinnati. He is a member of the House Ways and Means Committee, where he has worked to expand pension coverage and reform the IRS.