“Employer-sponsored retirement savings plans are an indispensable building block of our nation’s retirement system,” said Randolf H. Hardock, managing partner at Davis & Harman LLP, who testified at the hearing on behalf of the American Benefits Council.
“Retirement plans, like those sponsored and administered by the Council’s members, successfully assist tens of millions of families in accumulating retirement savings, and will provide trillions of dollars in retirement income and a more financially secure retirement,” Hardock said.
Jack VanDerhei, research director of the Employee Benefit Research Institute (EBRI), spoke to the Committee about the concept of measuring retirement security. He cited EBRI research that found 43.3% to 44.3% of Baby Boomers and Gen Xers in 2012 are projected to have inadequate retirement income for basic retirement expenses plus uninsured health care costs, a drop of 5% to 8% from the Institute’s 2003 analysis. VanDerhei attributed the improvement to the increase in the number of employers using automatic enrollment for their 401(k) plans.
David C. John, senior research fellow for Retirement Security and Financial Institutions at The Heritage Foundation and deputy director of the Retirement Security Project (RSP), provided several suggestions to help Americans improve their retirement savings.An automatic IRA is not the only path to expand retirement savings for workers, John pointed out, but called it a good start. “Employer-sponsored retirement plans, including 401(k)-type retirement savings accounts, are the best way for individuals to build retirement security,” John said.
John and Hardock both stated that automatic enrollment and automatic escalation are effective ways to boost plan participation by making it easier to save. John noted the need to extend the benefits of automatic saving to a much wider section of the population by combining several key elements of the current system: payroll deposit saving, automatic enrollment, low-cost, diversified default investments and IRAs.
Judy A. Miller, director of retirement policy for the American Society of Pension Professionals and Actuaries (ASPPA), cited data showing workplace savings as the key to promoting retirement security. More than 70% of workers earning $30,000 to $50,000 per year will participate in a plan at work, Miller pointed out, while fewer than 5% will save on their own through an IRA.
She used data from the Bureau of Labor Statistics showing 78% of all full-time workers with access to a workplace retirement plan, and 84% of those workers participating.Retirement Tax Incentives
Hardock told the Committee that retirement savings tax expenditures should not be reduced or tinkered with to pay for other initiatives, either inside or outside a tax reform process.
“Significantly, the bulk of the existing ‘tax expenditure’ for retirement plans is attributable to the deferral of tax provided to already saved retirement assets, not to future annual permitted contributions,” Hardock commented.
“Existing savings should not be taxed in order to finance more government spending, deficit reduction or to offset other tax initiatives, including lower marginal tax rates,” he added.
Combining Social Security and 401(k) Statements
John told the Committee that people need better information to make good decisions about how much they need to save for retirement. He suggested a statement that includes 401(k) and IRA information on balances, as well as Social Security benefit levels.
“Retirement savings account providers should be encouraged to add estimates of the account owner’s future Social Security benefits using information provided by the Social Security Administration (SSA) together with the annuitized value of retirement savings balances every year on either an annual statement in the case of IRAs or on one 401(k) quarterly statement,” John said.Plan Simplification
According to John the Bush Administration proposed streamlining several types of retirement savings accounts into two accounts approximately 10 years ago: a retirement savings account (RSA) and employer retirement savings accounts (ERSA). John believes these ideas are worth revisiting with changes from the original proposal.
Calling the ERSA a good idea, he said, “The original proposal would have consolidated 401(k), thrift, 403(b), and governmental 457 plans as well as Salary Reduction Simplified Employee Pension Plans (SARSEPs) and Savings Incentive Match Plan for Employees IRA (SIMPLE IRAs) into one simple account, which could be sponsored by any employer.
“The existing structure is confusing to employees, most employers, many tax professionals, and many financial services firms that don’t specialize in the specific account in question. In addition, because each account type has specific tax incentives and restrictions, it can be difficult to consolidate differing types of accounts,” John said.
He added that a simplified plan structure should encourage more employers to offer an ERSA to employees or to upgrade their automatic IRA to an ERSA. “This would almost certainly include greater coverage by small businesses. The ERSA would expand coverage, but would not eliminate the need for an automatic IRA,” said John.
Miller disagreed, stating, “A proposal to combine all defined contribution plans into a single type of plan might look like simplification on paper, but in practice, combining 401(k), 403(b) and 457(b’s) into a single type of plan would disrupt savings for employees of state and local governments and other nonprofits.”
To read the entire testimony from the hearing, visit http://waysandmeans.house.gov/Calendar/EventSingle.aspx?EventID=289485.
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