I • > 9 4 Chart 2 Chart 1 STATEMENT OF DALLAS SALISBURY STATEMENT OF DALLAS SALISBURY Conclusion According to Andrews, the favorable tax treatment provided pension plans reduces individual pretax contributions toEBRI a 401(k) at $7,000 (indexed), significantly reduced million create administrative civilian workers, problems or 54 percent for some of employers. all such workers, However worked , this for cannot an employer be qualified lowering EBRI has employer-sponsored of undertaken basic income extensive tax rates, plan. analysis which Typically over has , the reduced the past contribution 12 the years effective to is track made tax and incentive as aassess pretax for PRESIDENT EMPLOYEE BENEFIT RESEARCH INSTITUTE i i EMPLOYEE BENEFIT RESEARCH INSTITUTE Firm size remains a key factor in A constant theme reiterated by employers is their concern about regulatory T-70 the the overall costs of limits plan sponsorship. on both defined Sincebenefit pensionplans contributions and definedarecontribution treated as current plans, assessed fully until the provisions have been in effect longer. deduction that pension plans.sponsored trends. in (oraThree deferral pension facts of) plan. are salary Three-fourths particularly that is paid clear: of into allfirst, the workers plan smallby covered employers the employer by an areemployer moving on BEFORE THE SUBCOMMITTEE SUMMARY ON PRIVATE RETIREMENT PLANS Growth in private pension complexity AND and frequency OVERSIGHT of legislative OF THE change. INTERNAL Large REVENUE employers SERVICE can and do afford narrowed the circumstances under which money can be withdrawn from defined business expenses, funded plans are a good business decision. Pension plans are also behalf plan, or of47 themillion employee. workers, actually participated in the plan; two-thirds of all these away from defined benefit plans; second, they are not immediately replacing them pension coverage OF THE SENATE COMMITTEE ON FINANCE • EBRI has undertaken extensive analysis over the past 12 years to track and assess the costs, which can be small on a per employee basis. For small employers, contribution regarded Pension Coverage favorably participation plans, by increased bySm employees all Emp taxes loye because r on s preretirement they is can all defer withdrawals DC individual in income some cases, taxes on Many maintain that government regulation has made defined benefit plans too participants, pension with defined trends. or contribution 32 Three million factsworkers, plans; are particularly andwere third, entitled clear: the cost to first, a ofbenefit adminstering small at employers retirement. plansarerelative moving to MARCH 23, 1990 Percentage of private-sector, away from defined benefit plans; second, they are not immediately replacing them however, complex regulations require costly expert advice in establishing and full-time workers in 1988 The pension restricted Revenue contributions income Act of averaging, 1978 until alsoretirement. and created modified simplified By the making tax employee treatment benefits pensions mo of rcapital e secu (SEPs) re, gains. ERISA as a iow The costly, gapprompting in private-sector plan sponsors pension to coverage offer no fo pension r workers planappears or to shift to betolargely generally among less the amount that can be contributed has been eroding. Millions of active with defined contribution plans; and third, the cost of administering plans relative Statement to the amount that can be contributed has been eroding. maintaining a pension plan and the costly revision of plan documents. Changing may have increased the demand for pensions among employees. The provisions cost small burdensome way empfor loyers. small defined The employers latest contribution data to start indicate plans a pension that (see more EBRI, plan. than What68ispercent the Future of full-time of Defined Defined benefit plans have historically been the cornerstone of the private pension 90 participants Iam pleasedtoappearbeforeyou thismorning toreviewtherulesgoverning Before the Subcommittee on Private Retirement Plans regulatory and enforcement approaches by regulatory agencies add to both the cost • Since the enactment of ERISA, a steady stream of legislation has greatly influenced that may have made and pension Oversight coverage of the mo Internal re attractive Revenue include Service funding of standards, employees Pension changes in companies were alsowith included 250 orinmore budget employees bills in 1986 participate and 1987. in retirement In 1986, plans Benefit Pension Plans?, 1989). system Early legislation with an estimated such as the 38 Revenue million participants Act of 1921 and and beneficiaries, the Revenue Act and of $1.36 1926trillion first privatepensionplansand theirpossibleimpacton pensionparticipation and 80 (1988 expanded the Senate defCon_ittee initions) on Finance pension programs. From the Revenue Act of 1978 to the Omnibus Budget and45 confusion. I Thus, no matter what the nature of the change, if it is frequent or PBGC insurance, vesting and participation standards, and better information about were required to continue benefit contributions or accruals regardless of age for The plans, in trusteed Economic while,assets. by Recovery contrast, But recently, Act onlyof 16 1981 anpercent increased (ERTA) of full-time raised number Keogh of employees defined plan contribution benefit in companies and with provided Reconciliation tax-deferred Act of 1989, statusCongress to pensions. has changed In particular, some profit aspect sharing of the retirement plans gave coverage.My name isDallasSalisbury. Iam thepresidentoftheEmployee Benefit 70 68% Hearing on system almost annually. 4O complex, it will be costly. When combined with laws and regulations that make it benefit limits and the dollar limit on SEP contributions. workers plans through participating summaryin defined plan descriptions. contribution or defined benefit plans. In 1987, the less One terminations, than of the 24 most employees a slower significant do rate soof trends (chart defined in 2). pension benefit plan coverage formation, has been andthe fundamental tremendous employers the flexibility to forgo contributions in those years in which profits were ResearchInstitute (EBRI),a nonprofit,nonpartisan,publicpolicyresearch Pension Plan Complexity 60 • Pension legislation has served to increase the security of benefits for those with increasingly difficult to fund a plan, attractiveness fades further. And, when single-employer defined benefit termination insurance premium was raised and growth of 401(k) plans over the past decade. More than 27.5 million workers were redesign low. The of Self-Employed traditional "final Individuals pay" defined Tax Retirement benefit plans Actinto of 1962 "cashallowed balance" small defined 13 organizationbased inWashington,DC. EBRI haslongbeen committed tothe coverage, and it has created many jobs. It has not led to an increase in the proportion March 23, 1990 50 47% considered against other tax preferences, in light of today's low tax rates, the of35 workers covered by pension plans. Primary plan is DC mm funding The Since covered Tax pension Equity by rules 401(k) were law andplans encourages changed Fiscalin Responsibility May substantially. different 1988, uptypes Act fromof of 7.1 1982 plans, million (TEFRA) employers in May placed 1983. canself-employed match These pension figures Some benefit unincorporated members plans suggests of business Congress thatowners U.S. and employers other to start policymakers pension are reevaluating plans haveforindicated the themselves appropriateness concern and their about of accurate statistical analysis of public policy benefits issues. Through our research, we by 40 35% reluctance of small employers to expand pension coverage may be quite 30 sponsorship to their business situation. In particular, developments such as Keogh • businesses potential represented Employer-sponsored costs on24.2 an to percent equal society pension footing and and 7.1 to plans with future percent corporation represent retirees of all wo an themselves by rkers, impo making rtant respectively. ifcontribution source employer-sponso of Participation retiand rement red benefit these employees plans. for the first time through Keogh plans. strive to contribute to the formulation of effective and responsible health, welfare, Dallas L. Salisbury income for most working Americans. According to EBRI tabulations of the Mav 1988 understandable. President Pension plans, 30 401(k) legislation plans, has and served SEPs may to increase have made the security tax-favored of benefits pensionsformo those re attractive with pension limits thecoverage same forfails all pension to continue plans. the Under expansion TEFRA, of the so-called past 15 "top years,heavy" supplementing plans-- grew from 2.7 million workers (2.7 percent of all workers) in 1983 to 15.7 million and Current retirement Population policies. Survey employee benefit supplement, in May 1988, 62 million Employee Benefit Research Institute 25 civilian workers, or 54 percent of all such workers, worked for an employer that coverage, to small employers. and it has created many jobs. It has not led to an increase in the proportion Social those in Security which more and private than 60 savings. percent of benefits were going to "key" employees-- (13.8 The Employee percent of Retirement all workers) Income in 1988.Security Act of 1974 (ERISA), however, Increasingly, there has been a trend toward the establishment of defined 20 16% sponsored a pension plan. Three-fourths of all workers covered by an employer of plan, workers or 47 covered million workers, by pensionactually plans. participated in the plan; two-thirds of all these were required to provide minimum benefits or contributions to rank-and-file P represents en20 sion Law the most important landmark Primary in pension plan is legislation. DB ERISA provided contribution plans, especially with the advent of 401(k) cash or deferred 10 participants, or 32 million workers, were entitled to a benefit at retirement. Other provisions may impose additional costs on employers, however. Funding and To workers, An meet increasing this provide challenge number for faster of of workers providing vesting are standards, additional relying and oncoverage, 401(k) placed plans stricter a number as their limits of primary legislative on allowable arrangements participation and and vesting employee standards, stock ownership fiduciary plans. and funding By 1987, requirements, the number of anddefined it For over 50 years, the federal government has sought to encourage the 0 • Increasingly, 15 there has been a trend toward the establishment of defined 29 During the budget negotiations of 1989, various proposals that would affected benefits fiduciary for standards key employees. reduce the employer's flexibility to finance corporate expansion proposals contribution employer-based strengthenedspecifically plans reporting retirement represented aimed and plans, disclosure at 73 small percent especially employers rules. of all 401(k) In plans, general, have participants been up ERISA from introduced 68 focused at percent smallinon firms. Congress in 1975. The Bv establishment of pension plans through tax incentives. At the same time, public contribution plans, especially with the advent of 401(k) cash or deferred Number of employees: mm arrangements and employee stock ownership plans. By 1987, the number of defined pensions through 1988 CPSretained and EBS retirement found earnings. that income, more PBGC than including premiums 49 percent those are ofa 401(k) direct calling plan cost for imposed joint participants trusteeship, on areported per user in comparison, recent years. defined But the benefit benefits plansthat represented small employers 28 percent provide of allmust plans beinviewed 1987, down safeguards for pension plan participants. policy has been directed toward ensuring that plans are financially sound and 10 Less than 25-99 100-249 250 or contribution plans represented 73 percent of all plans, up from 68 percent in 1975. Bv comparison, defined benefit plans represented 28 percent of all plans in 1987, down and participant exit fees, basis Pension for defined Benefit benefit Guaranty plans. Corporation Plan descriptions (PBGC) and premium other reporting increases, and within The that pace this thewas ofcontext legislative their of primary the change nation's employer continued retirement pension with income the plan.Deficit Among system Reduction 401(k) and the participants Act economy of 1984as a from 32 percent 24 in 1975 (chart 1). more equitable. Some observers have questioned whether these changes are having the from 32 percent in 1975. 5 requirements also directly increase the administrative costs of the plan. (further whole ERISA if penalty reducing we are fees, to the judge were limits whether carefully on maximum national considered. plan needsMany contributions are being of these met. proposals and benefits) were , the not Since workingthe for enactment employersof ERISA, with 250 a or steady more stream employees, of legislation 43.5 percent has greatly had a primary influenced unintended effect of impeding pension growth. Because pension plan • The gap in private-sector pension coverage for workers appears to be largely among Employer I Included in _ Vested in enacted in 1989, but continued scrutiny of their administration and design is The Retirement 401(k); views this expressed Equity proportion Act of increased in 1984 this(reducing to statement 79.5 percent the minimum areforsolely 401(k) age participants those of plan of participation the in author and The pension nature programs. of this apparent From the shift Revenue in emphasis Act of 1978 from tothe thetraditional Omnibus defined Budget benefit administration has become such a complex and expensive field, some fear that small employers. The latest data indicate that more than 68 percent of full-time 0 should not be attributed to the Employee Benefit Research Institute, its sponsors plan plan employees in companies with 250 or more employees participate in retirement Restrictions anticipated in that 1990. cap contributions and benefit payments also make pension plans officers, from The establishments Economics 25 to trustees, 21), and with of Regulation the fewer sponsors, Single-Employer than 10 oremployees. other Pension staff. Plan The Amendments Employee Act Benefit of 1986 Research plan Reconciliation to the newer Act defined of 1989, benefit Congressandhas defined changed contribution some aspect plans of the has retirement been a source recent legislation has eroded employers' incentives to provide pension plans. 1975 1977 1979 1981 1983 1985 1987 plans, while, by contrast, only 16 percent of full-time employees in companies with plan Institute is a non-profit, non-partisan public policy research organization. less than 24 employees do so. less appealing, particularly for those motivated by the tax deferral on contributions. (restricting In of system continued a recent almost the EBRI evaluation. terms annually. studyunder , Pension Experts whichPolicy offer pension varying and plans Small observations can Employers: terminate on At the and What potential increasing Price the Others suggest that since plan provision is very limited in small businesses, Trends in Pension Coverage termination Coverage? reasons: The future ,increased author of insurance 401(k) Emily regulation sponsorship premiums Andrews of traditional that and examines participation single-employer defined the impact is benefit uncertain. plans of plans, pension must Passage increased pay). legislation of TRAon'86 additional incentives are needed to bolster pension coverage in the future. Employer-sponsored The Retirement Equity pension Act of plans 1984 also represent may have an important raised the source costs ofofplan retirement provision pension administrative does not plan appear growth cost to have due based to slowed regulation, on the 401(k) economic an plan increasingly growth, theory that although mobile employers work that possibility will force balance who may the The Revenue Act of 1978 expanded the opportunity to save for retirement on a tax- Source: Employee Benefit Research Institute Source: Employee Benefit Research Institute for some employers. The required five-year break-in-service provision increases costs be income remains better of for instituting as served most more with working restrictive a pension a "cash Americans. provisions plan balance" against According or ofdefined the the benefits lawto contribution become EBRI they tabulations fully receive. plans, effective. federal of theFinal May tax laws 1988 The Tax Reform Act of 1986 (TRA '86) marked a reversal in U.S. retirement policy, preferred basis by permitting employers to establish 401(k) arrangements. Through recordkeeping Current Population costs, Survey particularly employee in firms benefit withsupplement high employee (CPS turnover. EBS), in May 1988, 62 reducing that regulations have incentives created addressing incentives for hardship retirement for new withdrawals savings. definedIt capped contribution and loans, the released amount arrangements, in of August allowable and1988 the and 401(k) arrangements, participants may contribute a portion of compensation to a July 1989, respectively, could arguably be a deterrent to employee participation and EMPLOYEE BENEFIT RESEARCH INSTITUTE 2121 K Street, NW / Suite 600 / Washington, DC 20037-2121 Telephone 202-659-0670 FAX 202.775-6312