Ways and Means.
Summary paragraph: Expert testimony touts tax-favored retirement accounts
The House Committee on Ways and Means heard testimony last month on tax-favored retirement accounts, with several organizations coming to their defense.
"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," said Randolf H. Hardock, managing partner at Davis & Harman LLP, who testified at the hearing on behalf of the American Benefits Council.
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 Generation Xers are projected to have inadequate retirement income this year to cover basic retirement expenses and uninsured health care costs -- 5% to 8% fewer than the institute's analysis revealed in 2003. VanDerhei attributed the improvement to the increase in employers using automatic enrollment for their 401(k) plans.
David C. John, senior research fellow retirement security and financial institutions at The Heritage Foundation and deputy director of the Retirement Security Project (RSP), suggested how Americans can improve their retirement savings. "Employer-sponsored retirement plans, including 401(k)-type retirement savings accounts, are the best way for individuals to build retirement security."
Automatic enrollment and automatic escalation are effective ways to boost plan participation, by making it easier to save, both John and Hardock said. John noted the need to extend the benefits of automatic saving to a wider population by combining payroll deposit saving, automatic enrollment, low-cost, diversified default investments and IRAs.
Hardock told the committee that retirement savings tax expenditures should not be tinkered with or reduced 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 said.
"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.
People need better information to make good decisions about how much they need to save for retirement, John told the committee. He suggested providing them a statement that includes 401(k) and IRA information about 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."
According to John, the Bush administration, about 10 years ago, proposed streamlining several types of retirement savings accounts into two accounts: retirement savings accounts (RSAs) and employer retirement savings accounts (ERSAs). John believes these ideas are worth reconsidering. Commending the ERSA, 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 Plans for Employees [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," John said. "In addition, because each account type has specific tax incentives and restrictions, it can be difficult to consolidate differing types of accounts."
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, saying, "A proposal to combine all defined contribution plans into a single type of plan might look like simplification on paper, but, in practice, combining [a] 401(k), 403(b) and 457(b) into a single type of plan would disrupt savings for employees of state and local governments and other nonprofits."