There are a variety of tools individuals can use to help saving for retirement easier. One of the primary ways Americans set aside money for retirement is through an employer-provided retirement plan, which offers many 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: defined benefit and defined contribution. A defined benefit plan promises a fixed monthly benefit at the time of retirement, dependent on factors such as years of service and salary level. A defined contribution plan, in contrast, allows an employee to set aside a specific amount on a pre-tax or post-tax basis. Often, the plan sponsor, or employer, will also contribute an amount to the participant’s plan or “match” a percentage of the contribution. Benefits at the time of retirement will depend on the contributions made and the performance of those investments. Examples of defined contribution plans include 401(k) plans, IRAs, employee stock ownership plans, and profit sharing plans.
Federal law requires these employer-sponsored retirement 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. Studies show that low and moderate income workers are much more likely to save for retirement if they are offered a retirement plan at work. Incentives like the Saver’s Credit benefits lower-income workers who save through these plans, and all participants can benefit from tax-deferred savings through traditional 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 first quarter 2013, tax qualified retirement plans held $20.8 trillion in assets, of which approximately $16 trillion is attributable to employer-provided plans. This pool of capital helps to finance productivity-enhancing investments and business expansion. 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.
Retirement savers benefit from preferred tax treatment which incentivizes saving and lowers an individual’s current tax liability. The taxes are deferred until distributions are made during retirement, and it is worth noting that the tax deferral is not an exclusion. 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.
In November 2015, The U.S. Department of the Treasury announced the official rollout of myRA as a first step to helping people start saving for retirement. It provides a simple, no fee, government-backed savings options for those individuals who do not have access to a retirement savings plan at work or who are just starting to save.
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 would 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; and 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. Through greater education on the value of saving early with even the smallest contributions to a retirement account, myRA will help many more Americans take the first steps towards a more financially secure future.