Despite great strides in retirement security, some lawmakers and benefit leaders see an opportunity to revisit tax policies that could help incentivize all Americans to save more as they plan their exits from the workforce.
In turn, many in the employee retirement world fear that any politically motivated efforts to modify or eliminate tax advantages for worksite-sponsored retirement savings plans could seriously impair the success of the existing system.
And the system has been under fire this year, as President Barack Obamas myRA proposal and other state-sponsored individual retirement accounts options are considered both which will be funded by payroll deductions.
See also: Defending the 401(k)
Tuesdays Senate Committee on Finance meeting, Retirement Savings 2.0: Updating Savings Policy for the Modern Economy, argued the future of those tax incentives.
Depending on whom you ask, the more than $23 trillion retirement industry is in need of some serious modifications. Sen. Ron Wyden (D-Oregon), chairman of the committee, explained the incentives for savings in the tax code are not getting to the people who need them.
With a more than $100 billion annual price tag, the Center on Budget and Policy Priorities said last year that tax incentives for 401(k)s and IRAs are typically one of the largest federal tax expenditures. But because benefits generally go to higher-income households, new savings fall short for other populations. About 66% of the benefits sifted from these incentives were distributed to top 20% of taxpayers with the highest incomes, the fiscal policy organization said.
Sen. Orrin Hatch (R-Utah) says that incentives in the tax code have always helped to encourage retirement savings. Noting a 2001 increase by Congress for contribution limits, he urged for more information that could help policy decision-makers figure out what proposals could assist to close the American retirement gap. Earlier this year, Hatch introduced the Secure Annuities for Employee (SAFE) Retirement Act of 2013, a public and private pension reform bill that seeks an increased role for retirement asset management to fall to insurance companies as fixed-annuity contracts.
Citing past research from the Federal Reserve and the Government Accountability Office, Wyden noted that American workers have only $59,000 socked away in retirement savings, on average. Meanwhile, there are about 9,000 taxpayers who have individual retirement accounts that are worth more than $5 million.
The Leave-it-to-Beaver ideal of a worker spending 40 years with one firm and retiring with a generous pension and a gold watch is sorely outdated, said Wyden. Retirement policies need to keep up with the times.
Todays economy, according to Wyden, includes millions of Americans where retirement savings is an after-thought and paying monthly bills is more of a priority. With steady employment and cost of college still a bigger concern for many workers, Wyden said that the tax code should give all Americans the chance to get ahead.
With more than $6 trillion of American retirement assets in defined contribution and $6.6 trillion in IRAs, employers have a significant role in the countrys retirement health. James A. Klein, president of the American Benefits Council, a national trade association for companies worried about regulations tied to employee benefits, explains that policymakers are not cognizant of the integral role played by benefit plan sponsors and employer-sponsored retirement plans.
Lawmakers must not underestimate employers critical role in ensuring workers retirement security, Klein says, while noting that curtailing retirement plan tax incentives could have implications both now and in the distant future.
Kathryn Ricard, senior vice president for retirement policy at ERISA Industry Committee, a nonprofit association that represents the interests of large employer retirement, health and compensation plans, says steps to alter the current tax benefits for workplace savers could be a dangerous game.
ERIC urges Congress to exercise significant caution when considering any changes to the tax incentives relating to the retirement system and avoid major unintended adverse consequences, Ricard explains. She adds that changes to the rules for retirement plans often result in a chilling effect on savings even by individuals who are unaffected by the rules change.
While the Pension Protection Act of 2006 helped empower ERISA to include automated features to boost participation in DC plans, it also expanded the fiduciary investment advice option available to 401(k) participants.
Because of this amendment and the fact that about half of the assets in DC and IRA funds are attributable to the investment fund industry, fund companies also have a stake in the proposed changes, according to Brian Reid, chief economist at Investment Company Institute.
See also: 11 ERISA milestones
John C. Bogle, founder of The Vanguard Group, a fund powerhouse with more than 160 mutual funds with assets totaling over $1.4 trillion, told the Senate committee that he wasnt certain which way policies should go.
We must be careful in how we handle this politically charged issue, Bogle explained. It stands to reason that in order to gain tax advantages for themselves, employers (especially in small- and medium-sized companies) may well be more likely to provide 401(k) plans for their employees, surely a social good.
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