Chart 2 Chart 1 gTATI_MENTOF DALLAg gALIgBUR¥ • Pending legislative proposals such as joint _rusteeship, regardless of the merits, EBRI Em In R 40 e1 sa pl (k) trioy ctio rece er arran n -s nstpo gn e E th so m BRI a red ents t ca ,stu pdy, co pen participants ntributi sP io en nsion ons plans Pma olic and represent yy c bene and ontribute fiSmall t an payments imp aEmp po orti rtant loy on ers: also osfo At urce m com ak Wh e pensation o at pension f retirement Price plans to a T ad he ministr future ative of 40 cos 1(k t )EM ds up P eonsorship LO toYre EE gulati BENE o and n, FI participati an T RESEARCH increa osn inglyis uncertain. INSTITUTE mobile wor Pas k sa force ge of who TRA ma'86 y The Tax Reform Act of 1986 (TRA '86) marked a reversal in U.S. retirement policy, would add cost and complexity. , While it is unlikely , that the proposal T-74 itself has Firm size remains a key factor in influenced behavior, adoption certainly would. less Coverage? appealing, , author particularly Emily Andrews for thoseexamines motivated thebyimpact the taxofdeferral pension onlegislation contributions. on qualified income for employer-sponsored most working Americans. plan. Typically, According thetocontribution EBRI tabulations is made of as thea May pretax1988 E does be BRI better not has appear served undertakto with en have e axten "cash slowed sive balance" an 401(k) alysis or plan over defined growth, the pcontribution ast although 12 years that plans, to tra possibility ckfederal and assess tax laws reducing incentives for retirement savings. It capped the amount of allowable STATEMENT OF DALLAS SALISBURY SUMMARY Growth in private pension PRESIDENT pens/on coverage deduction pension • Portability plan in (or growth concerns deferral based are of)merited, on salary the economic that but isonly paidtheory ifinto thosethe that concerns plan employers by lead the employer will to preservation balance on the Current Population Survey employee benefit supplement (CPS EBS), in May 1988, 62 remains that haveascreated more restrictive incentives provisions for new defined of the law contribution become fully arrangements, effective. Final and the pension individual trends. pretaxThree contributions facts are particularly to a 401(k) at clear: $7,000first, (indexed), small employers significantlyare reduced moving EMPLOYEE BENEFIT RESEARCH INSTITUTE • EBRI has undertaken extensive analysis over the past 12 years to track and assess of pension dollars into retirement. Today, nearly all defined contribution plans participation is all DC BEFORE THE COMMITTEE ON SMALL BUSINESS OF million costs behalf Thepension Retirement ofof civilian instituting thetrends. employee. workers, Equity a Three pension Act or facts of 54plan 1984 percent emerge: against also of may first all the , have such small benefits workers, raised employers they thereceive. worked costs are moving offor plan an provision employer away lowering of basic income tax rates, which has reduced the effective tax incentive for Percentage the regulations overall limits addressing of onprivate-sector, both hardship defined withdrawals benefit plans andand loans, defined released contribution in Augustplans, 1988 and away from defined benefit plans; second, they are not immediately replacing them provide for lump sum distributions upon job change. Over 40 percent of private THE U.S. HOUSE OF REPRESENTATIVES from defined benefit plans; second, they are not immediately replacing them defined benefit plans provide for lump sums, and the number is growing each full-time workers in 1988 for some employers. The required five-year break-in-service provision increases plans. that sponsored a pension plan. Three-fourths of all workers covered by an employer Millions of active narrowed July with 1989, defined respectively the contribution circumstances , could plans; under arguably andwhich third, be amoney deterrent the cost canof to be administering employee withdrawnparticipation from plans defined relative and with defined contribution plans; JUNE and third 5, 1990 , the cost of administering plans year. Individuals, however, do not roll-over distributions (13 percent did in relative to the amount that can be contributed has been eroding. 1988). Legal changes which have increased the number of lump sums (such as recordkeeping 90 costs, particularly in firms with high employee turnover. The plan, According Revenue or 47 to million Act Andrews, ofworkers, 1978the also favorable actually created participated tax simplified treatmentemployee in provided the plan; pensions pension two-thirds (SEPs) plans of as all reduces a these low participants create administrative problems for some employers. However, this cannot be contribution to the amount plans, that can increased be contributed taxes on has preretirement been eroding. withdrawals in some cases, five year vesting) have served to discourage pension sponsorship as small • Since the enactment of ERISA, a steady stream of legislation has greatly participants, or 32 million workers, were entitled to a benefit at retirement. cost the businesses costs way of for plan small state sponsorship. employers a preferenceto Since start to pay pension a pension longer contributions service plan. workers are extra treatedcash as rather current than Many assessedmaintain fully until that the government provisions regulation have been has in effect made longer. defined benefit plans too restricted income averaging, and modified the tax treatment of capital gains. Statement 45 80 (1988 expanded definitions) influenced pension programs. From the Revenue Act of 1978 to the Omnibus watching pension dollars walk out the door with short service workers. Conclusion Early business Budget legislation expenses, Reconciliation such funded as the Ac plans tRevenue of 1989 are ,aAct Congress good of business 1921 has and changed decision. the Revenue some Pension aspect Act plans of of 1926 the arefirst also costly, prompting plan sponsors to offer no pension plan or to shift to generally less I am pleased to appearBefore before the youConm_ittee this morningon Small to review Business the rules of governing 70 68% retirement system almost annually. It is complicated and expensive to maintain 40 • Finally, it should be stressed that the pension system is in a strong financial regarded A constant favorably theme reiterated by employees by employers because they is their can concern defer individual about regulatory income taxes on Pension Defined The Economic benefit Coverage Recovery plans by Small have Acthistorically Emp of 1981 loyers(ERTA) been raised the cornerstone Keogh plan of contribution the private pension and burdensome provided tax-deferred defined contribution status to pensions. plans In (see particular, EBRI, What profitis sharing the Future plans of Defined gave Pension changes were also included in budget bills in 1986 and 1987. In 1986, plans private a plan. pension Simplification plans and of their the possible law and impact regulations on pension could make participation a difference. and The U.S. House of Representatives position today and that it is one of the most heavily regulated financial 60 benefit limits and the dollar limit on SEP contributions. pension system complexity "institutions". with contributions and an frequency estimated Comparisons untilof 38retirement. legislative million to theparticipants situation change. By making Large with and benefits Savings beneficiaries, employers more andcan secure, Loans and and $1.36 do are ERISA afford trillion Benefit Pension Plans?, 1989). were The gap required in priva to te-continue sector pensi benefit on contributions coverage for w or orkers accruals appears regardless to be lar ofgage ely for among employers the flexibility to forgo contributions in those years in which profits were coverage. My name is Dallas Salisbury. I am the president of the Employee Benefit Hearing on • Pension legislation has served to increase the security of benefits for those with without merit. Pension fund participation in mergers and acquisitions has 50 47% coverage, and it has created many jobs. It has not led to an increase in the may in the 35 trusteed costs, have which increased assets.can But be the recently, small demand onan afor per increased pensions employee number among Primary basis.of employees. For defined small plan benefit employers, Theis provisions DC 13 small employers. The latest data indicate that more than 68 percent of full-time workers low. The participating Self-Employed in Individuals defined contribution Tax Retirement or defined Act benefit of 1962 plans. allowedIn small 1987, the __mm largely been by public pension Pe funds nsion , which Plan are Issues not subject to the fiduciary Research Institute (EBRI), a nonprofit, nonpartisan, public policy research proportion of workers covered by pension plans. provisions of ERISA. The agencies charged with administration of ERISA have 40 35% 30 terminations that however, The Tax may Equity have complex , a made slower andregulations Fiscal pension rateResponsibility of coverage defined require costly benefit more Act of expert attractive plan 1982formation, advice (TEFRA) include in placed establishing and funding fundamental self-employed standards, and One employees of the in most companies significantwith trends 250 o in r mo pension re employees coverage participa has been te the in rtremendous etirement single-employer unincorporated business defined benefit owners termination to start pension insurance plans premium for themselves was raised and their and organization based in Washington, DC. EBRI has long been committed to the by worked hard to regulate fully and fairly, even though greater clarity and brevity • Employer-sponsored pension plans represent an important source of retirement in regulations and guidance, and prospective application when changes are made 30 redesign businesses maintaining PBGC insurance, ofon traditional a an pension vesting equal plan "final footing andand pay" participation with the defined costly corporation benefit revision standards, by plans of making and plan into better documents. contribution "cashinformation balance" Changing anddefined about benefit growth plans, while of 401(k) , by cont plans rastover , only the16 past percent decade. of full-time More than employees 27.5 million in comp workers anies were with employees funding rules for were the first changed time through substantially. Keogh plans. income for most working Americans. According to EBRI tabulations of the May accurate statistical analysis of public policy benefits issues. Through our research, we Dallas L. Salisbury in policy, would serve to encourage plan sponsorship and continuation. 25 President 1988 Current Population Survey employee benefit supplement, in May 1988, 62 regulatory limits plans benefit through the plans same andsuggests summary enforcement for all that pension plan U.S. approaches descriptions. plans. employers Under by regulatory areTEFRA, reevaluating so-called agencies the add "top appropriateness to heavy" both the plans-- cost of covered less than by 24 401(k) employplans ees do in so May (chart 1988, 2).up from 7.1 million in May 1983. These figures 20 16% strive to contribute to the formulation of effective and responsible health, welfare, million civilian workersEmployee , or 54 percent Benefit ofResearch all such workers Institute , worked for an employer that sponsored a pension plan. Three-fourths of all workers covered by these plans. and those confusion. in which more Thus, than no matter 60 percent what of thebenefits nature of were the going changeto , if "key" it isemployees-- frequent or The represented 20 Employee24.2 Retirement percent and Income 7.1Primary percent Security of all Act plan workers, of 1974 is respectively. (ERISA), DB however, Participation Pension legislation has served to increase the security of benefits for those with and retirement policies. 10 an employer plan, or 47 million workers, actually participated in the plan; two- Washington, D.C. were complex, required it will tobeprovide costly. minimum When combined benefitswith or contributions laws and regulations to rank-and-file that make it Some Since grew thirds from pension members of2.7 alllaw million these of encourages Congress participants workersand different ,(2.7 other or percent 32policymakers types million of of all workers plans, workers) have , employers were indicated in 1983 entitled can to concern 15.7 match to amillion benefi about pension t at represents the most important landmark in pension legislation. ERISA provided coverage, and it has created many jobs. It has not led to an increase in the proportion 5 June 1990 retirement. 0 15 29 workers, Increasingly, increasingly provide difficult there for hasfaster to been fundvesting aatrend plan,standards, toward attractiveness theand establishment placed fades further. stricter of defined limits And, when on allowable (13.8 sponsorship percent to of their all workers) business in situation. 1988. In particular, developments such as Keogh participation Pension potential Law costsand to society vesting and standards, to future fiduciary retirees and themselves funding if requirements, employer-sponsored and it of workers covered by pension plans. Number of employees: mm • Increasingly, there has been a trend toward the establishment of defined contribution considered benefits for against key plans, employees. other especially tax preferences, with the advent in light of 401(k) of today's cashlow or tax deferred rates, the plans, 401(k) plans, and SEPs may have made tax-favored pensions more attractive strengthened pension coverage reporting fails to and continue disclosure the expansion rules. In general, of the past ERISA 15 focused years, supplementing on For over 50 years, the federal government has sought to encourage the 10 contribution plans, especially with the advent of 401(k) cash or deferred Less than 25-99 100-249 250 or arrangements and employee stock ownership plans. By 1987, the number of reluctance of small employers to expand pension coverage may be quite arrangements to small employers. and employee stock ownership plans. By 1987, the number of defined safeguards Social An increasing Security for number pension and private of plan workers savings. participants. are relying on 401(k) plans as their primary During the budget negotiations of 1989, various proposals that would affected establishment of 24 pension plans through tax incentives. At the same mor time, e public defined contribution plans represented 73 percent of all plans, up from 68 percent understandable. 5 contribution The pace of legislative plans represented change continued 73 percent with of allthe plans, Deficit up Reduction from 68 percent Act ofin1984 1975. By employer-based in 1975. By comparison retirement , plans, defined especially benefit plans 401(k) represented participants 28 at percent small of firms. all plans The pensions and retirement income, including those calling for joint trusteeship, user policy has been directed toward ensuring that plans are financially sound and in 1987, down from 32 percent in 1975. m Employer m Included in D Vested in (further comparison Other provisions reducing , defined may the benefit limits imposeon plans additional maximum represented costs plan 28 on contributions percent employers, of allhowever. and plans benefits), in Funding 1987,the down and To 1988 meet CPS this EBSchallenge found thatof more providing than 49 additional percent of coverage, 401(k) plan a number participants of legislative reported Since and exit the fees, enactment Pensionof Benefit ERISA, Guaranty a steady stream Corporation of legislation (PBGC) has premium greatly increases, influenced and equitable. Some observers have questioned whether these changes are having the 0 • The gap in private-sector pension coverage for workers is largely among small The views expressed in this statement are solely those of the author and sponsors plan plan from 32 percent in 1975 (chart 1). fiduciary Retirement standards Equity Act reduce of 1984 the (reducing employer's the flexibility minimumto finance age of plan corporate participation expansion proposals that this was specifically their primary aimed employer at small employers pension plan. haveAmong been introduced 401(k) participants in Congress pension ERISA penalty programs. fees, From were the carefully Revenue considered. Act of 1978 Many to of the these Omnibus proposals Budget were not unintended effect of impeding pension growth. Because pension plan should not be attuibuted to the Employee Benefit Research Institute, its employers. The latest data indicate that more than 68 percent of full-time 1975 1977 1979 1981 1983 1985 1987 plan officers, trustees, sponsors, or other staff. The Employee Benefit Research employees in companies with 250 or more employees participate in retirement through from in recent 25 to retained years. 21), and But earnings. the the benefits Single-Employer PBGCthat premiums smallPension employers are a Plan direct provide Amendments cost imposed must be Act on viewed of a per 1986 Reconciliation working for employers Act of 1989, withCongress 250 or more has changed employees,some 43.5aspect percent of the had retirement a primary enacted in 1989, but continued scrutiny of their administration and design is administration has become such a complex and expensive field, some fear that Institute is a non-profit, non-partisan public policy research organization. plans, while, by contrast, only 16 percent of full-time employees in companies The system (restricting participant with nature almost lessbasis of the than this annually. terms for 24 apparent employees defined under shift which benefit doinso. pension plans. emphasis The Plan reduced plans from descriptions can the taxterminate ra traditional tes and of TRA and other defined 1986 increasing reporting , combined benefit the within 401(k); anticipated the this context proportion in 1990.of the increased nation's toretirement 79.5 percentincome for 401(k) system participants and the economy in as a recent legislation has eroded employers' incentives to provide pension plans. with the funding limitations of OBRA 1987, have made plans much less plan to the newer defined benefit and defined contribution plans has been a source termination requirements insurance also directly premiums increase that the single-employer administrative costs plansofmust the plan. pay). establishments whole if we are with to judge fewerwhether than 10national employees. needs are being met. Others attractive suggestfrom that the since tax plan perspective. provision Small is very employers limited in have small never businesses, sponsored plans in large numbers and the present environment makes it unlikely that this Source: Employee Benefit Research Institute Source: Employee Benefit Research Institute of continued evaluation. Experts offer varying observations on the potential The Trends Revenue in Pension Act ofCoverage 1978 expanded the opportunity to save for retirement on a tax- additional incentives are needed to bolster pension coverage in the future. will change. reasons: increased regulation of traditional defined benefit plans, increased The Economics of Regulation preferred basis by permitting employers to establish 401(k) arrangements. Through EMPLOYEE BENEFIT RESEARCH INSTITUTE 2121 K Street, NW / Suite 600 / Washington, DC 20037-2121 Telephone 202-659-0670 FAX202-775-6312