Employers Need Incentives to Offer Retirement Plans

Sen. Tom Harkin (D-Iowa), chairman of the Committee, began the roundtable discussion, “Pension Modernization for the 21st-Century Workforce,” by saying that the defined benefit (DB) pension crisis is underreported. Today only about one in five people have pension plans, whereas one in two had these plans 30 years ago.   

Harkin recently released a report titled “The Retirement Crisis and a Plan to Solve It.” The heart of his plan is a new system of privately run hybrid pension plans, which incorporate many of the benefits of traditional pensions while substantially reducing the burden on employers (see “Harkin Retirement System Proposal Gets Mixed Reviews”). Harkin’s proposal requires that individuals who are not covered by an employer-sponsored retirement plan be automatically enrolled in regulated, privately run retirement funds.   

David Madland, director of the American Worker Project, Center for American Progress, said during the roundtable that Harkin’s proposal is a good tradeoff because it functions like a defined contribution (DC) plan for employers, but like a defined benefit (DB) plan for employees.   

Harkin asked witnesses what the pension system should look like to meet the challenges of the global economy and provide security for working Americans.   

Aliya Wong, executive director of retirement policy for the U.S. Chamber of Commerce, said the Chamber believes a successful private retirement system is voluntary, flexible and innovative.

Jim Davis, owner of Iowa Title and Realty, told the committee that he thinks employees should be required to fulfill one year of service at their companies before being eligible for a pension plan. Providing a longer time period before eligibility provides employees an incentive to stay at a company, which Davis said is preferable for small-business owners to retain employees.   

“We need to give business owners a reason to offer [a plan],” said Susan Breen-Held, consulting actuary at Principal Financial. Some incentives might be to increase compensation limits, or either raise or remove compensation limits for five years when the plan is first established, she said. In addition, she suggested lowering the administrative cost for small businesses by reducing some testing requirements from annually to every three years—or for very small plans, exempting them completely from testing.   

Harkin said his proposal takes the administrative burden off of employers, which Davis agreed makes it easier for employers to offer a benefit.   

Breen-Held told the committee that DB and DC are both important sources, and the soundest way to provide adequate retirement benefits is not through one plan type but looking at the system as a whole through strengthening each part of the system.   

“I’m not sure that we believe that the system is broken today,” she said. “I think that what you have is a very firm foundation … Is it perfect? No, but I do believe that it provides a starting place so that we can look at what’s working, what’s not working and learn lessons and build on those lessons…”   

The lessons learned are that a voluntary system must be simple to operate, and it must give employers more tax incentives to offer these plans. In addition, employees must understand the value of the plan and of having an annuity, she said.

Wong agreed that decreasing complexity, as well as unnecessary regulatory burdens, is crucial for business owners to adopt a pension plan. Policymakers can take several steps to encourage sponsorship of DB plans, she said. Streamlining notices and disclosures is one way to simplify the system. In addition, electronic delivery would be “extremely helpful” in eliminating administrative burdens and providing employees vital information, she said.   

Wong said the Chamber urges the Treasury and Internal Revenue Service (IRS) to set forth a clear and rational approach to Pension Protection Act (PPA) compliance for Pension Equity Plans. “More broadly, because of the complexity of hybrid plans and their regulation, additional guidance is critical to ensure that plan sponsors have enough clarity and flexibility to adopt and maintain hybrid pension plans with legal certainty,” the Chamber said in a statement.   

Separately, the American Benefits Council issued a statement with their recommendations, saying it strongly supports the current tax incentives for retirement plan contributions.   

“Some have suggested fundamental changes to the tax treatment of retirement plans, and 401(k) plans in particular, but such proposals are seriously flawed and could be fraught with unintended consequences — especially for those with lower incomes, who find it the most difficult to save,” James A. Klein, president, said in the statement.  

To forge a retirement system for the future, the Council suggested a number of improvements to manage risks, reduce costs, eliminate administrative burdens and improve coverage including:  

• Promoting financial and investment education;  
• Encouraging electronic communication and disclosure;  
• Providing fiduciary safe harbors for plan sponsors;  
• Facilitating flexible retirement strategies and plan designs;  
• Continuing to stabilize funding obligations; and 
• Conducting a thorough review of pension insurance premiums.  

Complete statements from the roundtable are available on the Committee’s website at http://www.help.senate.gov/hearings/.