Apr.House Ways and Means Committe Discusses Retirement Plans & Savings in Context of Tax Reform
At a House Ways and Means Committee hearing on April 17, lawmakers discussed current options for retirement savings with respect to employer-based defined contribution plans and with respect to IRAs.
In his opening statement, Chairman Dave Camp (R-Mich.) said the proliferation of tax-favored retirement accounts has led some to question whether the large number of plans with different rules and eligibility requirements leads to confusion, reducing the effectiveness of the incentives in increasing retirement savings.
Camp said “I believe there are three important principles to keep in mind when evaluating tax-favored retirement vehicles: (1) simplification; (2) increased participation, particularly by low and middle-income taxpayers; and (3) whether the tax benefits are effective and properly targeted.”
In his opening statement, Ranking Member Sander Levin (D-Mich.) said the basis structure “of our current system should be preserved, and that this structure should not be repealed to pay for tax reform.” Rather than acting as an opportunity to find revenue, tax reform should strengthen the current retirement savings system and expend participation, said Levin.
Testimony
In his opening testimony, Jack VanDerhei, Research Director at the Employee Benefit Research Institute (EBRI), said baby boomers and “Gen-X” households are at a 43 percent risk of not having sufficient income at retirement. However, that number is better than nine years ago according to VanDerhei. Among the reasons behind the improvement, VanDerhei said “the short answer is the extremely positive impact from automatic enrollment in 401(k) plans.”
VanDerhei discussed the implications of proposals that would modify tax benefits for defined contribution plans by capping annual contributions or changing the before tax nature of employee and employer contributions in exchange for government matching contributions. “The potential decrease in retirement income resulting from either employer modifications to existing retirement plans or employees reducing future contributions to these plans needs to be analyzed carefully when considering the overall impact of the proposals,” he said.
In her opening statement, Judy Miller, Chief of Actuarial Issues and Director of Retirement Policy at the American Society of Pension Professionals and Actuaries, said deferral and non-discrimination rules are unlike other tax incentives in the code. Because of deferral, the amount of revenue you think you would be saving is not actual. Later in her statement Miller said the savings generated from retirement savings tax incentives are a large part of employers, especially small employers, decision to offer a plan.
Miller said the ASPPA supports the auto-IRA proposal developed by the Retirement Security Project and proposed in H.R. 4049, sponsored by Representative Neal (D-Mass.). She added “reducing incentives for small business owners to sponsor retirement plans is the opposite of what needs to be done.”
In his opening statement, William Sweetnam, Principle at the Groom Law Group, discussed the different retirement savings vehicles currently out there and the simplification proposals established by the Office of Tax Policy, where Sweetnam formerly worked. At the end of his remarks, Sweetnam noted that any effort “to advance tax reform will likely include a review of the retirement savings incentives” and recommended the Committee examine the work of the Office of Tax Policy during the Bush administration.
In his testimony, David John, Senior Research Fellow in Retirement Security and Financial Institutions at the Heritage Foundation, noted that most retirees will need some other means of additional retirement income that will likely come from an “expanded and improved retirement savings system or from additional government-provided benefits.” John discussed the Automatic IRA plan he co-authored saying it would provide “a relatively simple, cost-effective way to increase retirement security for the 75 million Americans working for employers (usually small businesses) that do not offer a retirement plan.” In addition, John viewed employer-sponsored retirement plans including 401(k)-type retirement savings accounts as the “best way for individuals to build retirement security.”
John suggested that Congress can and should extend benefits of automatic saving to the wider populace by combining several elements of our current system including payroll deposit saving, automatic enrollment, low-cost, diversified default investments, and IRAs. Later in his testimony, John advocated for simplifying “the current confusing series of retirement account types and tax treatments so that both ordinary Americans and employers can better understand their savings options.”
In his opening testimony, Randy Hardock, Partner at Davis & Harman LLP, who testified on behalf of the American Benefits Council said the current retirement system “is working.” He added that any new restriction that changes or reduces retirement savings tax incentives is a “bad idea.”
Short term gains from reducing retirement savings tax incentives “is an illusion,” he said. However, the retirement system can be improved as more Americans need access to workplace retirement savings plans. Automatic enrollment and automatic increase designs should be looked at as these plans will accelerate participation. Hardock also said Congress should also support e-delivery.
Question and Answer
Several of the respondents during the question and answer session stated their support behind an automatic IRA proposal.
Camp asked the panel whether the system of current retirement savings should be consolidated to help Americans save.
Hardock said consolidating would be both disruptive and confusing for employers and participants. John added that the large number of plans causes anxiety among small businesses who are considering a plan.
Rep. Wally Herger (R-Calif.) asked whether an automatic IRA would create additional costs on employers who are offering IRAs, to which John said “no they would not.”
Rep. Lynn Jenkins (R-Kan.) referred to the President’s FY 2013 budget and asked whether limiting the deduction for pre-tax employee contributions to defined contribution plans and contributions to traditional IRAs on the front end, “but not when the amount is distributed” amount to double taxation?
Miller said she was “very disappointed” to see retirement savings included in the proposal “because you’re right, it would be double taxation because this is a deferral.”
Rep. Richard Neal (D-Mass.) discussed his Automatic IRA Proposal which would raise the national savings rate by $8 billion a year. Despite not getting any support from Republicans, Neal asked why the Heritage Foundation supports it. John said it is inevitable that without establishing a retirement system that applies to all that allows people to continuously save even when switching jobs, “we’re going to see people who do not have sufficient retirement savings” who will come to Congress to ask for more taxpayer benefits. He added, “we don’t have the money for that.”
Rep. Vern Buchanan (R-Fl.) discussed the uncertainty and concern expressed by baby boomers about retirement. He asked what Congress could do to make a difference.
Miller said when looking at tax reform, it is important to keep the catch-up contributions. She added that Congress needs to look more at electronic delivery to increase engagement. John said “we need to very carefully examine the question of guaranteed lifetime income, annuity-type products… to make sure we don’t have the same individuals worried now even more worried when they’re 85.”
In a follow-up question, Buchanan asked what incentives Congress can provide to small businesses to provide retirement packages to their employees. Hardock said Congress has traditionally supported small business startup credits “to send a signal, once again, that if you set up this kind of plan, we will help you with that initial administrative expense.”
Rep. Kenny Marchant (R-Texas) asked John for his thoughts on the effect on retirement savings if the Bowles Commission’s 2020 proposal was adopted. John deferred to VanDerhei who said the proposal would hit the highest income quartile. “We found people currently 36-to-45, if it applied today, would have a 15 percent reduction on average in their retirement balances.” In addition, the second biggest hit comes on the lowest income quartile, according to VanDerhei.
Rep. Erik Paulsen (R-Minn.) focused on employee stock ownership plans (ESOPs) and asked whether Congress should protect ESOPs in the context of “successful retirement saving vehicles as we tackle tax reform and also attempt to simplify the defined contribution retirement system as well.” Sweetnam said ESOPs “have provided very good benefits for people.” He added, “[w]e shouldn’t be cutting back on retirement benefits and ESOPs…. I think everyone is fine with continuing them.” Miller said “it’s important to maintain them… I’m not sure I can say it’s a model.”
Rep. Tom Price (D-Ga.) asked the panel for their thoughts on the greatest impediment the government puts in place “to either the employer or the employee for setting up a flexible, responsive retirement plan.”
VanDerhei discussed major improvements to automatic enrollment and automatic escalation of contributions. However, he said a number of employers have adopted a safe harbor approach “which unfortunately” has a cap of 10 percent. He added, most financial planners would say that in addition to what employers are matching, “you need something more than just a 10 percent contribution per year.” VanDerhei told the Committee that employees should be allowed to go over this cap.
For more on the hearing, please click here.
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At a House Ways and Means Committee hearing on April 17, lawmakers discussed current options for retirement savings with respect to employer-based defined contribution plans and with respect to IRAs.
In his opening statement, Chairman Dave Camp (R-Mich.) said the proliferation of tax-favored retirement accounts has led some to question whether the large number of plans with different rules and eligibility requirements leads to confusion, reducing the effectiveness of the incentives in increasing retirement savings.
Camp said “I believe there are three important principles to keep in mind when evaluating tax-favored retirement vehicles: (1) simplification; (2) increased participation, particularly by low and middle-income taxpayers; and (3) whether the tax benefits are effective and properly targeted.”
In his opening statement, Ranking Member Sander Levin (D-Mich.) said the basis structure “of our current system should be preserved, and that this structure should not be repealed to pay for tax reform.” Rather than acting as an opportunity to find revenue, tax reform should strengthen the current retirement savings system and expend participation, said Levin.
Testimony
In his opening testimony, Jack VanDerhei, Research Director at the Employee Benefit Research Institute (EBRI), said baby boomers and “Gen-X” households are at a 43 percent risk of not having sufficient income at retirement. However, that number is better than nine years ago according to VanDerhei. Among the reasons behind the improvement, VanDerhei said “the short answer is the extremely positive impact from automatic enrollment in 401(k) plans.”
VanDerhei discussed the implications of proposals that would modify tax benefits for defined contribution plans by capping annual contributions or changing the before tax nature of employee and employer contributions in exchange for government matching contributions. “The potential decrease in retirement income resulting from either employer modifications to existing retirement plans or employees reducing future contributions to these plans needs to be analyzed carefully when considering the overall impact of the proposals,” he said.
In her opening statement, Judy Miller, Chief of Actuarial Issues and Director of Retirement Policy at the American Society of Pension Professionals and Actuaries, said deferral and non-discrimination rules are unlike other tax incentives in the code. Because of deferral, the amount of revenue you think you would be saving is not actual. Later in her statement Miller said the savings generated from retirement savings tax incentives are a large part of employers, especially small employers, decision to offer a plan.
Miller said the ASPPA supports the auto-IRA proposal developed by the Retirement Security Project and proposed in H.R. 4049, sponsored by Representative Neal (D-Mass.). She added “reducing incentives for small business owners to sponsor retirement plans is the opposite of what needs to be done.”
In his opening statement, William Sweetnam, Principle at the Groom Law Group, discussed the different retirement savings vehicles currently out there and the simplification proposals established by the Office of Tax Policy, where Sweetnam formerly worked. At the end of his remarks, Sweetnam noted that any effort “to advance tax reform will likely include a review of the retirement savings incentives” and recommended the Committee examine the work of the Office of Tax Policy during the Bush administration.
In his testimony, David John, Senior Research Fellow in Retirement Security and Financial Institutions at the Heritage Foundation, noted that most retirees will need some other means of additional retirement income that will likely come from an “expanded and improved retirement savings system or from additional government-provided benefits.” John discussed the Automatic IRA plan he co-authored saying it would provide “a relatively simple, cost-effective way to increase retirement security for the 75 million Americans working for employers (usually small businesses) that do not offer a retirement plan.” In addition, John viewed employer-sponsored retirement plans including 401(k)-type retirement savings accounts as the “best way for individuals to build retirement security.”
John suggested that Congress can and should extend benefits of automatic saving to the wider populace by combining several elements of our current system including payroll deposit saving, automatic enrollment, low-cost, diversified default investments, and IRAs. Later in his testimony, John advocated for simplifying “the current confusing series of retirement account types and tax treatments so that both ordinary Americans and employers can better understand their savings options.”
In his opening testimony, Randy Hardock, Partner at Davis & Harman LLP, who testified on behalf of the American Benefits Council said the current retirement system “is working.” He added that any new restriction that changes or reduces retirement savings tax incentives is a “bad idea.”
Short term gains from reducing retirement savings tax incentives “is an illusion,” he said. However, the retirement system can be improved as more Americans need access to workplace retirement savings plans. Automatic enrollment and automatic increase designs should be looked at as these plans will accelerate participation. Hardock also said Congress should also support e-delivery.
Question and Answer
Several of the respondents during the question and answer session stated their support behind an automatic IRA proposal.
Camp asked the panel whether the system of current retirement savings should be consolidated to help Americans save.
Hardock said consolidating would be both disruptive and confusing for employers and participants. John added that the large number of plans causes anxiety among small businesses who are considering a plan.
Rep. Wally Herger (R-Calif.) asked whether an automatic IRA would create additional costs on employers who are offering IRAs, to which John said “no they would not.”
Rep. Lynn Jenkins (R-Kan.) referred to the President’s FY 2013 budget and asked whether limiting the deduction for pre-tax employee contributions to defined contribution plans and contributions to traditional IRAs on the front end, “but not when the amount is distributed” amount to double taxation?
Miller said she was “very disappointed” to see retirement savings included in the proposal “because you’re right, it would be double taxation because this is a deferral.”
Rep. Richard Neal (D-Mass.) discussed his Automatic IRA Proposal which would raise the national savings rate by $8 billion a year. Despite not getting any support from Republicans, Neal asked why the Heritage Foundation supports it. John said it is inevitable that without establishing a retirement system that applies to all that allows people to continuously save even when switching jobs, “we’re going to see people who do not have sufficient retirement savings” who will come to Congress to ask for more taxpayer benefits. He added, “we don’t have the money for that.”
Rep. Vern Buchanan (R-Fl.) discussed the uncertainty and concern expressed by baby boomers about retirement. He asked what Congress could do to make a difference.
Miller said when looking at tax reform, it is important to keep the catch-up contributions. She added that Congress needs to look more at electronic delivery to increase engagement. John said “we need to very carefully examine the question of guaranteed lifetime income, annuity-type products… to make sure we don’t have the same individuals worried now even more worried when they’re 85.”
In a follow-up question, Buchanan asked what incentives Congress can provide to small businesses to provide retirement packages to their employees. Hardock said Congress has traditionally supported small business startup credits “to send a signal, once again, that if you set up this kind of plan, we will help you with that initial administrative expense.”
Rep. Kenny Marchant (R-Texas) asked John for his thoughts on the effect on retirement savings if the Bowles Commission’s 2020 proposal was adopted. John deferred to VanDerhei who said the proposal would hit the highest income quartile. “We found people currently 36-to-45, if it applied today, would have a 15 percent reduction on average in their retirement balances.” In addition, the second biggest hit comes on the lowest income quartile, according to VanDerhei.
Rep. Erik Paulsen (R-Minn.) focused on employee stock ownership plans (ESOPs) and asked whether Congress should protect ESOPs in the context of “successful retirement saving vehicles as we tackle tax reform and also attempt to simplify the defined contribution retirement system as well.” Sweetnam said ESOPs “have provided very good benefits for people.” He added, “[w]e shouldn’t be cutting back on retirement benefits and ESOPs…. I think everyone is fine with continuing them.” Miller said “it’s important to maintain them… I’m not sure I can say it’s a model.”
Rep. Tom Price (D-Ga.) asked the panel for their thoughts on the greatest impediment the government puts in place “to either the employer or the employee for setting up a flexible, responsive retirement plan.”
VanDerhei discussed major improvements to automatic enrollment and automatic escalation of contributions. However, he said a number of employers have adopted a safe harbor approach “which unfortunately” has a cap of 10 percent. He added, most financial planners would say that in addition to what employers are matching, “you need something more than just a 10 percent contribution per year.” VanDerhei told the Committee that employees should be allowed to go over this cap.
For more on the hearing, please click here.