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GAO analyzes current trends in retirement savings plans

April 29, 2014

The Government Accountability Office (GAO) has recently released a report that examines current trends in pensions, the effectiveness and cost of pension tax incentives, trends in the formation of private pension plans, and the income characteristics of plan participants who are affected by statutory contribution limits. The issue of retirement savings in general is becoming increasingly important in light of Social Security’s highly publicized funding issues and the growing number of retired and retiring baby boomers. This article examines GAO’s findings and some recent proposals to reform the current retirement tax incentive scheme.

Background. Certain rules governing employee benefit plans specifically apply either to “defined contribution” (DC) plans or to “defined benefit” (DB) plans. A DC plan, such as a 401(k), provides for individual accounts for participants and for benefits based on those accounts. (Code Sec. 414(i)) A DB plan is a pension plan other than a DC plan. (Code Sec. 414(j)) It provides for the payment of definitely determinable benefits to the employee over a period of years, usually for life, after retirement. (Reg. § 1.401-1(b)(1)(i))

To encourage private-sector employers to sponsor pension plans and U.S. workers to save for retirement, there are a number of tax incentives for employer-sponsored pension plans and other retirement savings vehicles. One such incentive is the deferral of tax (until distribution) of certain employer contributions to qualified pension plans, contributions made at the election of the employee through salary reduction, and income earned on pension assets. For 2014, the Joint Committee on Taxation has estimated that these deferrals will result in the U.S. Treasury forgoing around $100 billion in income taxes.

To prevent use of these tax incentives to subsidize excessively large pension benefits, there are limits on the amount of tax-deferred contributions that can be made to tax-qualified pension plans. For example, for 2014, the statutory limit on elective deferrals under Code Sec. 402(g)(1) is $17,500; the limit on catch-up contributions under Code Sec. 414(v)(2)(B)(i) is $5,500; and the limit on combined employer/participant contributions under Code Sec. 415(c)(1)(A) is $52,000.

Shift in U.S. retirement plans. A separate GAO report titled “Trends in Marriage, Work, and Pensions May Increase Vulnerability for Some Retirees” (GAO-14-272T), issued in March (see ), noted that over the last two decades, employers “have increasingly shifted away” from offering their employees traditional DB plans, choosing instead to offer DC plans. DB plans typically offer retirement benefits to a retiree in the form of an annuity that provides a monthly payment for life, as opposed to a DC plan where workers and employers may make contributions to individual accounts. According to a report by the National Institute on Retirement Security titled “The Retirement Savings Crisis: Is It Worse Than We Think?”, DC plans were “originally designed to supplement—rather than replace—DB pensions,” and “[t]his shift from DB pensions to DC plans has significantly eroded the retirement readiness of Americans.” (See

GAO observed that households with DC plans have greater responsibility to save and manage their retirement savings so that they have sufficient income throughout retirement, but that many households approaching retirement have no or very limited retirement savings. In addition, individuals with DC plans face challenges comparing their distribution options, in part due to a host of complicated factors that must be considered in choosing among such options.

Current trends in private pension plan formation & participants. In “Pension Tax Incentives Update” (GAO014-334R), GAO found that from 2009 to 2011 (the most recent years for which information was available), most of the new single-employer plans were small DC plans. Specifically, 93% of all new plans formed during this period were DC plans, and 79% were small DC plans. However, aggregate net plan formation was negative over this period because plan terminations exceeded new plan formation. The total number of private pension plans in 2011 was below that in 2000.

Using 2010 data, GAO found that about 6% of all DC participants (or about 2.4 million people) contributed at or above one of the statutory limits in effect at the time. This percentage was 8% in ’98, and 5% in 2007.

Of these 6% of affected DC participants in 2010, about 3% were under age 50 and contributed at or above the 2010 annual elective deferral limit of $16,500; about 3% were aged 50 or older and contributed at or above the 2010 annual catch limit of $5,500; and about 0.1% of DC participants of all ages contributed at or above the 2010 annual combined employer/participant contribution limit of $49,000.

GAO also found that, similar to prior years, the DC participants contributing at or above the 2010 statutory limits were more likely to (i) have higher levels of annual compensation; (ii) own their homes, own stock, or have an IRA; and (iii) be male.

Retirement-related proposals. Given the well-documented financial woes of Social Security and the increased push for tax reform, it comes as no surprise that there have already been a number of specific proposals this year relating to retirement savings.

Specifically, President Obama has taken executive action and directed the Treasury Department to create a new retirement savings vehicle called a “myRA” (see Weekly Alert ¶  2  02/06/2014). He also has reiterated prior retirement-related proposals including establishing “auto-IRAs,” limiting the benefit of tax breaks (including those for retirement) for high-income households to 28%, and limiting contributions to tax-preferred savings accounts once the balances reach approximately $3.2 million.

In addition, House Ways and Means Committee Chairman Dave Camp (R-MI) included many retirement-related provisions in his tax reform plan (see Weekly Alert ¶  1  03/06/2014), and Senate Finance Committee Chairman Ron Wyden (D-OR) has indicated that the issue of retirement savings was a priority. Given the increased sense of urgency regarding the issue, it may prove to be one to watch over the coming year.

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