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Retirement Planning > Retirement Investing

Witnesses to Congress: Be Careful with Retirement Accounts

By Elizabeth D. Festa

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WASHINGTON BUREAU — Lawmakers should think twice before meddling with 401(k) plans, individual retirement accounts and other retirement savings programs, witnesses told the Senate Finance Committee today.

Some budget hawks have suggested in recent weeks that Congress should eliminate or reduce many tax breaks, including the tax breaks that encourage workers to contribution to individual retirement accounts (IRAs), 401(k) plans, and other retirement savings arrangements.

But, today, 401(k) plans and other defined contribution plans “are the component of retirement security that appears to be generating the most non-Social Security retirement wealth for baby boomers and Gen Xers,” Jack VanDerhei, a researcher at the Employee Benefit Research Institute (EBRI), Washington, testified at a hearing on tax reform options and retirement savings

Judy Miller, chief of actuarial at the American Society of Pension Professionals and Actuaries (ASPPA), Arlington, Va., said Congress should “make it easier for employers, particularly small businesses, to offer a workplace savings plan to their employees.”

About 70% of U.S. households now have an IRA or an employer-sponsored retirement plan. At the end of 2010, private employer-sponsored defined contribution plans held about $4.5 trillion in assets, private employer-sponsored defined benefit plans held $2.2 trillion and state and local retirement plans held $3 trillion, according ASPPA.

There was another $4.7 trillion held in IRA accounts, with a majority of those assets coming from rollovers and employer-sponsored arrangements.

Given that EBRI has found that eligibility for such plans is key to future retirees’ financial fate, “the logic of modifying (either completely or marginally) the incentive structure of employees and/or employers for defined contribution plans at this time needs to be thoroughly examined,” VanDerhei said.

Sen. Max Baucus, D-Mont., the committee chairman, and Sen. Orrin Hatch, R-Utah, the highest ranking Republican, said they sponsored the hearing because of concerns about the erosion of Social Security and the possibility that retirees might outlive their savings.

Baucus said he worries about the erosion of the defined benefit pension plan system, and the possibility that defined contribution plans may be blurring the line with personal savings, tempting some to overspend early in retirement. In other cases, he said, lack of long term care insurance might force retirees to spend their savings on medical bills.

The Pension Rights Center, Washington, is advocating both short-term and long-term changes in the Internal Revenue Code to help increase savings.

The center is calling for a reverse match option for 401(k) plans – or a mechanism in which an employer would lead with a contribution for people who could not afford to start – and new incentives for defined benefit plans – the “dinosaurs of savings.”

There should be a new system on top of Social Security “that covers everyone and that provides adequate and secure income,” Karen Friedman, the center’s executive vice president testified at the hearing.

Miller, the witness from ASPPA, said there is reason for optimism that coverage by the current system will increase over time.

Miller presented a chart indicating that younger workers have shown dramatic gains in ownership of retirement savings accounts over the past decade. The increasing use of automatic enrollment is also expected to increase take-up rates, according to ASPPA.

Meanwhile, more frequent use of 401(k) plan auto-enrollment programs seems to be decreasing the percentage of households at risk of falling into poverty in retirement, according to a 2010 EBRI study.

But at-risk percentages could increase if Congress changes the provisions now excluding employer retirement plan contributions from taxable income, VanDerhei warned.

“Modest changes can and should be made to expand coverage, but care should be taken to preserve and enhance the basic framework of the current incentives that motivate employers to sponsor retirement plans, and both employers and employees to contribute to these arrangements,” Miller said.

Other retirement trends coverage from National Underwriter Life & Health:

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