IMHO: Working “Outs”?

While options were presented to improve things (see “Industry Groups Urge No Changes to Retirement Savings Tax Advantages”, the discussion quickly veered toward a debate on whether and how well—or poorly—the current system is working. 

That said, listening to the witnesses,¹ one might well have thought they were discussing completely different systems—from one that is striking a good balance between incentivizing employers and encouraging participants to one that is all about providing tax benefits for saving to those who don’t require such enticements; from one that is putting too much responsibility on individual savers to one that has managed to, on a voluntary basis, draw the support of roughly eight in 10 workers.  One that has failed, and seems unlikely to ever deliver a real retirement income solution—or one that has the potential to make that a reality.

Metrics Systems

As always, the devil is in the details—and perhaps in the definitions underlying those details.  As the Employee Benefit Research Institute’s (EBRI) Dr. Jack VanDerhei pointed out in testimony submitted for the hearing, “Unfortunately, the ‘success’ of these plans issometimes measured by metrics that are not at all relevant to the potential for defined contribution plans to provide a significant portion of a worker’s pre‐retirement income.”  Among those metrics, VanDerhei cited such things as the “average” 401(k) balance and what it would provide in retirement income (with no adjustment for the reality that many, if not most, of the participants in the denominator of that calculation are years, if not decades, away from retirement age), and even the focus on what the average balance is for workers nearing retirement age—but only applying that calculation to the 401(k) balance with the employee’s current employer.² 

Judy Miller, Chief of Actuarial Issues/Director of Retirement Policy, American Society of Pension Professionals and Actuaries, outlined several “myths” in her testimony, including the notion that the current tax incentives are dramatically tilted toward upper-income workers,³ that those incentives cost the government money (there is a cost to the government’s deferral of taxation, of course, but the government does get its money eventually, albeit generally outside the government’s projection windows), and that only about half of working Americans have access to a workplace retirement plan.  Miller noted the Bureau of Labor Statistics (BLS) found that 78% of all full-time civilian workers had access to retirement benefits at work, with 84% of those workers participating in these arrangements—a far cry from the “common wisdom” that too many in our industry still parrot.⁴ 

In fact, the devil in that particular statistic depends on whom you want to include as the “relevant” workforce—or perhaps the point you want to make. 

There are some things we do know. First, given the opportunity, the vast majority of workers save for retirement via their workplace retirement plan, and that, outside those structures, they don’t.  We know that the vast majority of workers that are automatically enrolled in such programs stay enrolled, that most who have their rate of savings automatically increased leave those increases in place.  We know that workers whose deferral rates are set by default don’t change those defaults.  We know that workers tend to save at the level of the employer match, when a matching contribution is available.  We also have, thanks to EBRI, an emerging body of evidence that the current structures can produce, alongside Social Security, reasonable levels of retirement income.

We also know that most employers that offer a workplace retirement plan contribute something of value to those plans: an employer contribution, a matching contribution, and/or the time/expense of running the plan—or more than one of the foregoing.  Moreover, there is strong anecdotal evidence that, lacking the incentives of the current tax structures, fewer employers will offer—or support—those programs than do at present. 

Therefore, based on what we do know, it would seem that we should (1) to continue to encourage the establishment of defaults high enough to better ensure a satisfying outcome without undermining participation, and (2) to provide for systems that will move those default savings thresholds higher over time. 

More importantly, IMHO, we should do everything we can to encourage more employers to offer, and to continue to offer, these programs. 

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 1 Arguably, the best days of our current voluntary savings structures are ahead of us, but the sheer data on retirement savings accumulations in defined contribution plans and individual retirement accounts are impressive. During the hearing, Senator Orrin Hatch (R-Utah) noted that “more money has been set aside for retirement in defined contribution plans and IRAs than in Social Security.” Hatch said, “The Social Security Trust Fund holds $2.6 trillion in Treasury securities. But private, employer-based defined contribution plans hold $4.7 trillion. And IRAs hold even more: $4.9 trillion.”

2 For a broader discussion on this topic, see also “IMHO: Comparison ‘Points’

3 In her testimony, ASPPA’s Miller noted that households with incomes of less than $50,000 pay only about 8% of all income taxes, but receive 30% of the defined contribution plan tax incentives. Households with less than $100,000 in AGI pay about 26% of income taxes, but receive about 62% of the defined contribution plan tax incentives.

4 EBRI’s Jack VanDerhei offers an insightful analysis of these numbers in Appendix B of his testimony. I commend it to your review.