Employer-provided retirement plans offer advantages to workers. Employers voluntarily establish these plans and add value by acting as fiduciary and investment management overseers, monitoring plan fees, selecting quality investment alternatives, making contributions, providing financial education, and encouraging and facilitating savings through payroll deductions.
Generally, there are two types of retirement plans. A defined benefit plan promises a specific monthly benefit at the time of retirement. A defined contribution plan does not promise a specific monthly benefit. Instead, an employee and / or their employer will make contributions to the plan and invest those contributions. Benefits at the time of your retirement will depend on the performance of those investments. Examples of defined contribution plans include 401(k) plans, IRA plans, employee stock ownership and profit sharing plans.
Federal law requires these plans be operated “solely in the interest of” the participants. They must meet broad coverage and nondiscrimination tests that ensure that the eligibility and operation of the plan are fair. Low and moderate income workers are much more likely to have retirement savings if they are offered a retirement plan at work. The Saver’s Credit benefits lower-income workers who save through these plans.
Retirement savings plans play an important role in the capital markets as it is the contributions from those plans that form a large amount of the capital invested in our financial markets. As of March 2011, tax qualified retirement plans held $18.1 trillion in assets, of which approximately $14 trillion is attributable to employer-provided plans. This pool of capital helps to finance productivity enhancing investments and business expansion. Contributions by employees and employers to defined contribution plans continued even through the recent years of financial stress. Changes to the tax treatment of retirement plans that would reduce contributions or discourage the establishment and maintenance of plans could negatively impact the role of these pivotal players in the capital markets.
Taxes on retirement savings are deferred, not excluded. Deferral treatment is not equivalent to the exclusion associated with other tax expenditures. As individuals begin to retire, distributions from their retirement savings are taxed and that tax revenue will flow to the U.S. Treasury.
