Transcript The Politics of Retirement A Washington Update

How Washington’s Policy
Initiatives Could Impact
The Retirement Plans Industry
Marcia S. Wagner, Esq.
Tax Reform v. Pension System
Structural Reform
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Tax Cost of Retirement Plans
• Impact of Pan Contributions on Federal Deficit
– $70.2 Billion Annually
– $361 Billion 2011 – 2015
•
Tax Reform
•
Pension System Reform
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Tax Reform
•
2013 Plan Limitations that Can Be Reduced to Limit Deficit:
– Annual Additions from All Sources - $51,000.
– Elective Deferrals - $17,500.
– Plan Sponsor Deduction - 25% Participant Compensation.
– Limit on Compensation Base to Determine Benefits/Contributions - $255,000.
•
Obama FY 2014 proposed $3 million cap on aggregate lifetime contributions.
− Cap to vary based on age.
− Double tax if prohibited amount not withdrawn.
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Tax Reform (cont’d)
•
National Commission on Fiscal Responsibility.
• 20/20 Cap: Limits Contributions to Lesser of $20,000 or 20%
Compensation.
•
Brookings Institution.
• Tax All Employer and Employee Contributions.
• Refundable Tax Credit Deposited to Retirement Savings Account.
•
Obama Administration proposals to raise revenue.
• 11.6% tax on employer & employee plan contributions.
• High earners only.
• Basis adjustment for extra tax.
• Repeal of dividends paid deduction for ESOP sponsors.
• $25 billion in PBGC premium increases.
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Pension System Reform: StateSponsored Initiatives
• Secure Plan Proposal by National Conference on Public Employee
Retirement Systems
• State sponsored cash balance plans for private-sector
° 6% annual credits
° Minimum 3% interest credits
• Participation voluntary but withdrawal liability assessed on
terminating employers
• Seeks to benefit from economies of scale
• Funding shortfall would be state responsibility
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Pension System Reform: StateSponsored Initiatives (cont’d)
•
California Secure Choice Retirement Savings Program
− Mandatory payroll deduction auto-IRA program
° Auto enrollment at 3% unless employee opts out
° Required for enterprises with 5 or more workers if no current plan
° State chooses investment managers
° Guaranteed rate of return
− Signed by governor but implementation subject to IRS and DOL approval
•
Other State Initiatives
− Massachusetts enactment of defined contribution multiple employer plan for
non-profits
− At least 11 other states said to be considering plans for private-sector
employees.
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Pension System Reform: Automatic IRAs
• Legislative History
– Auto IRAs proposal appears to be partisan.
– But had bi-partisan support in prior years.
– Increasing retirement plan coverage is shared policy
goal.
• Three Key Features
– Default contribution rate set at 3%.
– Post-tax Roth IRA would be default, but employee
could choose pre-tax Traditional IRA.
– Multiple alternatives available for selecting Auto IRA
provider.
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Pension System Reform: Automatic IRAs
(cont’d)
• Objections to Auto IRAs
– Burdensome mandate for small businesses with more than ten
employees.
– Federal government control overs assets.
– Role of private sector.
• Partisan politics will continue in short term.
– But bipartisanship support typically emerges on retirement issues.
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Pension System Reform: Proposals at
Federal Level
•
USA Retirement Funds proposed by Sen. Tom Harkin
•
Sen. Harkin issues “report” in July 2012 that proposes new retirement system:
- Automatic and universal enrollment required by employers with no plan.
- Regular stream of income starting at retirement age.
- No lump sum withdrawals.
- Financed by employee contributions through payroll & government credits
- Privately managed investment by new entities called “USA Retirement
Funds”.
- Limited employer involvement and no fiduciary responsibility.
- Unspecified level of required employer contributions.
- Employees can increase/decrease contributions or opt out.
•
Similarities to proposals for state-covered pensions of private-sector workers.
•
Would include enhancements to Social Security.
•
Text of bill expected in 2013.
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Pension System Reform: Proposals at
Federal Level
• SAFE Retirement Act proposed by Sen. Orrin Hatch
– Starter 401(k) Plans
• Up to $8,000 participant contributions annually
• Reduced administration and no discrimination testing
• Auto deferrals from 3% to 5%
– Government sponsors may adopt SAFE Retirement Plan
• Annual purchase of fixed annuities for participants
• Insurers to be selected by bidding process
• Improve funding and security but pays smaller benefits
– Restores jurisdiction over prohibited transactions to IRS
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Systemic Reform - Other Proposals
• Unitary Defined Contribution System espoused by John Bogle,
Vanguard founder
– Consolidation of all retirement savings programs
– Federal Retirement Board controls system
°Limit distributions and loans to prevent system leakage
°Limit number of investment options concentrating on lowcost funds
• ERISA fiduciary standards extended to service providers /
money managers
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Systemic Reform – Other Proposals
(cont’d)
•
Proposals by Academics
• Teresa Ghilarducci (The New School)
- eliminate current tax breaks and use savings to make 5% contribution to all
employees
- mandatory contributions and guaranteed investment return equating to defined
benefit approach, supplementing Social Security
- participants in existing plans could continue in such plans if contributions are 5%,
no early withdrawals, mandatory conversion to annuity on retirement
- people not in employer plans would be mandated into Guaranteed Retirement
Accounts (“GRAs”) with mandatory 2.5% employer and employee contributions;
investments pooled and professionally managed to reduce fees.
• Meir Statman (Santa Clara University)
− defined contribution approach similar to Australian and British systems.
– mandatory employer and employee contributions.
− investment controlled by account owner.
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Systemic Reform – Other Proposals
(cont’d)
• Center for American Progress – Liberal Think Tank
– Secure, Accessible, Flexible, Efficient (“SAFE”)
– Dismantle and replace existing voluntary private pension system
governed by ERISA
– Create new collective defined contribution plan
– Every employer will make automatic payroll deductions on behalf
of each employee; each employee can opt out
• Money from payroll deductions funneled to non-profit organizations
run by independent boards to professionally invest
• No self-direction
• Pay out is annuity form only.
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Summing Up
•
Significant Transformation of Private Retirement System Possible.
•
Tax Reform.
• Reducing tax incentives will shrink system.
° Lower contributions at all income levels result if tax exclusions cut back.
• Obama proposal for general limit on benefit from tax exclusions.
°Does not focus directly on 401(k) contributions.
° Provides political cover.
° Same effect on contributions as direct cutback on excludible amount
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Summing Up (cont’d)
− Systemic Changes
• Intended to create access for low-wage employees
• Government will replace private employers in system
°Mandated benefits
°Guaranteed benefits and/or investment results
°Creation of new interest group to lobby for expansion of benefits
°Government influence in choosing investment managers or control of
investments could drive many out of the retirement industry.
• State-level programs may cause breakdown in uniformity of pension laws,
effective since enactment of ERISA
• Inflection Point regarding the types of Retirement Schemes Nation wants
and needs
• Interesting Times ……
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How Washington’s Policy
Initiatives Could Impact
The Retirement Plans Industry
Marcia S. Wagner, Esq.
99 Summer Street, 13th Floor
Boston, MA 02110
Tel: (617) 357-5200 Fax: (617) 357-5250
Website: www.wagnerlawgroup.com
[email protected]
A103929
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