September 16, 2014
- Witnesses Debate Value of Employer Plans in Senate Hearing on Retirement Security
- Council Comments on Final Regulations Regarding Suspension or Reduction of Safe Harbor Nonelective Contributions
Witnesses Debate Value of Employer Plans in Senate Hearing on Retirement Security
The U.S. Senate Finance Committee heard testimony from a panel of retirement policy experts and academics on September 16, as part of the hearing Retirement Savings 2.0: Updating Savings Policy for the Modern Economy. Since no employer organizations or individual companies were invited to testify, the Council issued a press statement and will be submitting testimony for the official hearing record.
As we reported in a September 3 Benefits Byte story, Finance Committee Chairman Ron Wyden (D-OR) issued a public statement in conjunction with ERISA’s 40th anniversary, linking retirement security and possible comprehensive income tax reform. “As the Finance Committee continues to work on comprehensive tax reform this fall, we will take a close look at pension and retirement rules in the tax code to make improvements wherever they’re needed,” Wyden said.
The Joint Committee on Taxation (JCT) recently released a report to the congressional tax-writing committees asserting that the collective tax incentives provided to retirement plans constitute the second-highest federal tax expenditure (i.e., loss of revenue to the federal government) for the next five years (more than $800 billion, including defined contribution plans, defined benefit plans and IRAs). Numerous proposals to curtail the value of these tax incentives have been proposed over the past several years.
In his statement opening the hearing, Wyden was critical of the existing system, saying “the incentives for savings in the American tax code are not getting to those who need it.” In particular, he suggested that measures may be needed to help part-time workers, younger workers and women save more effectively for retirement. He also cited a recent Federal Reserve Board report that suggested many households are not adequately prepared for retirement.
Ranking Republican committee member Orrin Hatch (R-UT), in his opening statement, said he would view with skepticism any assertion that retirement savings tax incentives are “upside down” without hard evidence. Hatch stressed the importance of a bipartisan approach to retirement policy and urged support for his Secure Annuities for Employee (SAFE) Retirement Act (S. 1270) [official summary], which includes provisions facilitating greater use of electronic communication and automatic enrollment. (The Council expressed support for S. 1270 in a July 2013 letter to Hatch.)
The committee heard testimony from the following individuals:
- John C. Bogle, founder and former CEO of Vanguard, argued that defined contribution plans “cry out” for structural reform. In particular, he recommended increased use of index funds as investments (rather than actively managed funds), larger contributions from employees and a requirement that employers maintain their contributions.
- Brian Reid, chief economist at the Investment Company Institute (ICI), listed the ways in which the retirement system has grown stronger over recent decades and emphasized that the tax incentives for retirement plans are deferrals rather than true exclusions or deductions. (The Council joined with ICI and the American Council of Life Insurers in releasing a paper, Our Strong Retirement System: An American Success Story, in December 2013.)
- Scott Betts, senior vice president of National Benefit Services (a third-party plan designer and administrator), also praised the effectiveness of the private employer-sponsored retirement system in general, and 401(k) plans in particular. He also voiced his support for Hatch’s bill, S.1270.
- Brigitte C. Madrian, Aetna Professor of Public Policy and Corporate Management at Harvard University’s John F. Kennedy School of Government, described research results indicating “the behavioral response to savings incentives are not particularly large” and identified a number of other non-tax-related barriers to saving. She specifically cited automatic IRAs and open multiple-employer plans as more effective tools for increasing coverage than tax incentives.
- Andrew G. Biggs, resident scholar at American Enterprise Institute, argued that the notion of a “retirement crisis” is overstated, but suggested policymakers encourage retirement saving through automatic enrollment measures, state-based plans, simplified pension plans and proposals like one suggested by Senator Marco Rubio (R-FL), who has recommended opening the federal Thrift Savings Plan to private sector workers.
Ellen Schultz, former Wall Street Journal reporter and outspoken critic of certain aspects of employer plans, was scheduled to testify but was not able to appear.
During the question-and-answer period, Senators covered a wide range of topics.
- Hatch discussed the motivations for employers to establish a plan, asking if tax incentives influence an employer’s decision to sponsor a plan.
- Sen. Charles Grassley (R-IA) followed on Hatch’s inquiry with questions about whether small businesses would be more likely to sponsor a plan if the nondiscrimination rules were relaxed and whether a shift to “Roth” (i.e., post-tax) accounts would pose concerns for employers.
- Sen. Sherrod Brown (D-OH) raised the possibility of mandatory automatic enrollment and escalation into index funds.
- Sen. Cardin (D-MD) suggested that thebenefit plan nondiscrimination issue needs to be resolved (as he did in a letter with Sen. Rob Portman (R-OH) to the IRS in November 2013). He also cited his Church Plan Clarification Act (S. 952) as a measure that would help retirement coverage.
- Portman discussed possible reforms of the minimum distribution rules and the creation of a universal savings vehicle, as had been proposed by the George W. Bush administration.
- Sen. Maria Cantwell (D-WA) expressed interest in integrating guaranteed lifetime income products as part of retirement plans.
The Council’s media statement urged lawmakers not to underestimate the role of employers in ensuring workers’ retirement security. “Innovations such as automatic enrollment, automatic escalation, life-cycle investing and hybrid plans, expand access and improve outcomes for participants,” said Council President James Klein in the statement. “Finance Committee members should consider how tax and retirement policy can build on the existing system, rather than destabilize it.”
Council Comments on Final Regulations Regarding Suspension or Reduction of Safe Harbor Nonelective Contributions
In September 12 written comments to the Internal Revenue Service (IRS), the Council provided suggestions for improvements to previously issued regulations regarding the suspension or reduction of safe harbor nonelective contributions.
The IRS issued a formal information collection request (IFR) on July 15 referring to the final regulations issued by IRS in November 2013 that revised the requirements for permitted mid-year reductions or suspensions of safe harbor non-elective and matching contributions to 401(k) and 401(m) plans (see the November 14, 2013, Benefits Byte for details on the final regulations).
Under these regulations, plan sponsors of 401(k) safe harbor plans are allowed to discontinue nonelective contributions in the middle of a plan year provided certain conditions are met. The Council’s formal comments state that “the ability to maintain the plan while temporarily reducing or eliminating employer contributions during the economic downturn was a ‘win-win’ for both the employer and employee when compared to the alternative of plan termination.”
The comments voiced support for the previously issued guidance as well as the U.S. Treasury Department and IRS announcement that it will provide guidance on safe harbor 401(k) plans as part of the Department of Treasury’s 2014-15 Priority Guidance Plan.
The Council’s suggestions for the new guidance include:
- Permit changes that do not affect safe harbor features or any information contained in the notice. If a plan is changed mid-year, but is enhanced in some way or otherwise changed in a way that would not have affected a participant’s decision to contribute, that amendment should not affect safe harbor status. The Council urged that plan sponsors be allowed to make amendments that do not impact the safe harbor features or the notice information.
- Allow certain corrective and other amendments designed to maintain plan qualification.The Council recommended that Treasury and IRS permit certain amendments that may be necessary for the continuing qualification of the plan or to correct a discrimination situation without affecting the safe harbor status of the plan.
- Allow certain amendments but only in connection with mergers and acquisitions.Exceptions for plans involved in corporate merger or acquisition transactions would allow a company that is acquiring another company that has a safe harbor plan to freeze the safe harbor formula mid-year so that the 401(k) plans involved in the corporate transaction can be merged. Otherwise, the safe harbor plan of a “company” acquired through asset acquisition may be terminated with distributions to participants. This leads to leakage if plan participants do not roll over the distributions.
The Council believes these suggestions will help facilitate use of the proposed guidelines while maintaining the appropriate policy perspective. For more information, contact Jan Jacobson, senior counsel, retirement policy, at (202) 289-6700.