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. At the end of the fourth quarter 2011, tax qualified retirement plans held $17.9 trillion in assets, of which approximately $13 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.
On January 28, 2014, President Barack Obama outlined the creation of a MyRA in his State of the Union Address. The program is intended to be a starter retirement savings solution for low- to moderate- income workers. The Department of Treasury has been directed to lead a deliberative process to rollout the program by initially conducting a pilot. Treasury will be clarifying certain details such as the administrative expense for the MyRA account owners and Treasury’s authority to initiate the program without Congressional action.
SIFMA is committed to preserving and enhancing the voluntary employer-provided retirement system and the tax incentives that support it. These plans help millions of American families achieve a secure retirement. The Joint Select Committee on Deficit Reduction should preserve the current tax treatment that encourages employers to offer and workers to contribute to retirement plans.
The employer-sponsored retirement plan system has introduced tens of millions of American workers to retirement saving. Employers voluntarily establish and promote these plans to help their workers build assets for a secure retirement. Eliminating or diminishing the current tax treatment of employer-provided retirement plans will jeopardize the retirement security of tens of millions of American workers, impact the role of retirement assets in the capital markets, and create challenges in maintaining the quality of life for future generations of retirees.
American workers who do not have access to employer plans can save for their retirements in a tax-deductible IRAs today. According to The IRA Investor Database, a data collection effort done by the Investment Company Institute (ICI) and SIFMA, IRAs are used by working age Americans across all income levels. The American retirement system that provides incentives to save is one of the most effective government programs. It encourages workers to save for their retirements and, along with Social Security, will result in secure retirements for millions of Americans workers. Enhancements can be made to make it more effective. Additional awareness and education about the existing programs and incentives, small business retirement plan enhancements and IRA reform will further strengthen the system.
SIFMA supports the creation of the MyRA savings bond as a tool to promote retirement savings. Given the vast numbers of baby boomers who reach retirement age every day, retirement savings incentives are needed more than ever to help people ensure their retirement security. We will work as necessary with the Treasury Department and Congress to offer support and guidance as the program is established.