zero contributions in method one would still have some contributions in method two (leading to
with yielded •economic Requires an average growth employee negative assumptions, contributions 75-year and actuarial utilizes to bebalance taken a thousand from of-0.97 taxable economic percent income scenarios of taxable (while that 401(k) payroll introduce for a
proposal plan'?will This So provide cial method Securi_'s a general subtractsframework $6 Goals 00 (orand the for participant's each Criteria plan in for which current Assessing the deferral, total Reforms participant's if less) from each
Any plan that did not pass either of the above two tests was excluded from further
viiiSee VanDerhei, et. al. (1999). Analysis of account balances and loan infommtion was provided in addition to
Chart 6:
Chart 8:
This qhe characteristics would be a best-case in bold scenario are Chart the most because 1: common all ofin the employer-sponsored surplus would be placed individual into
contribution FICA surplus contributi isonly, modeled ons and areas tax-deferred); 0.70 follows: percent xi of and taxable payroll for FICA surplus plus interest. When
full a higher rangeADPN) of possible and all economic HCEs considered outcomes, to asbe opposed "at risk" toin doing the second static straight-line method would projections. have a
participant and recomputes their ADP's.
analysis. ×v
asset allocation information.
Chart 7:
Chart 5:
examining smaller deferral the various than inscenarios, method one 91 percent (leading of tothe a smaller scenarios ADPH). resulted in a negative 75-year
Our account •modct Provides plans uses today. earnings no matching To projections the degree contribution; that that areflect new mandatory actual lifetime universal income government patterns (based program upon were
equities, whercas if individuals Statementwere of Dallas allowedL.to Salisbury, invest in President individual & accounts CEO as they saw fit,
ixBoth Yakoboski and VanDerhei (1996) and Clark and Schieber (1998) had a large number of participants but what
Projected Future Annual Social Security
actuarial balance Percentage for the FIC Th A-surplus-only ousands of Ben oefi fcase, Emph ts while From )yers 85 percent Average-Cost by of the scenarios had a
some Bureauofof thcLabor surplus Statistics would Administrative data), be invested as opposed in bonds. to the Furthermore, Costs "unisex fiat Matter in earnings our modeling for typical we forced households" the
less gene Total rousThe contribution than-employer percentage = of employee plans, plans one that deferral would would + expect beemployer in violation that employees match of both + QNEC, would the basic where: continue and alternative to
matters in this At typethis of analysis stage of is that the Employee aanalysis, sufficient number there Benefit are of Research plans several be available potential Institute tomethods determine of themodeling distribution the of match
Distribution of Annual Earnings: Total Workers
would clearly provide a set of limited incentives which would be insufficient to cause employees
rates negative by salary.. 75-year actuarial balance for the FICA-surplus-plus-interest case (see Charts 3 and 4).
participate used equity ADP bypcrccntage Approximately most tests in the analyses. (assuming employer to Bene increase This 13no percent fi plan. permits corrective ts by more For fo ofr assessment all example, than Retirees measures 401the (k) annual if plans of were the effects (Vari employer's are FICA taken) estimated on otax us are more surplus 401(k) tabulated Years) to than be plan regardless just impacted and the offers shown "average" under of nothe match in method Chart but
Committee on Ways and Means
likely • impact Employee fromdeferral a competing will be plan subject with to matching Internal contributions. Revenue Service ,ffR L Two Sections methods402(g) wereT-118 and
IA by Birth Cohort, S. 2313 (NCRP)
Tax Deposit Schedule, 1997
to leave an employer plan, and most employees would consider themselves to be better off
xThis variable has been used extensively in the academic literature on an aggregate basis; however, our data
Percentage Reduction in Males' Benefits, From Low- to
vs. DC Participants
worker, and allows more accurate measurement of"rates of return" on individual accounts. Our
includes performance two. 10. This It pa_oll should varies of equities deduction from be noted a over low each that of thethis 7 pay 1 percent 2-year estimate period period. for and of plans the several This number withis investment less realistic, of than plans 10 since options, impacted participants, overwhile 1would 2 years to theaneed high it is to highly ofbe 21
Subcommittee on Social Security
choscn 415(c), to illustrate and potential the importance ADP/ACP of behavioral restrictions, assumptions in quantifying the likely
contributing to the employer plan (where available) than to the government plan.
provides more powerful analysis since we are able to look at the average match for a particular individual and
3,800
improbable model allowsthat analysis bonds of would alternative outperform Excluding formsequities. self-employed of transition In addition, costs, and and govt once alternative employees the program payment began periods to have
government percent for plans plan offers with Year 50-99 no match, participants. NRA 985 few investment With FICA options, Age 65 98Sand With a contributi FICA on once each year, the
re-estimated High- Administrative if AGI thresholds U.S. were Cost, House imposed by ofBirth Representatives for eligibility Cohort,inS. the2313 government (NCRP) 's matching
impact, xv'
• Employer match will attempt toChart replicate 3: the contribution formula in place for plan x
50% .......
observe their specific deferrals.
Promise Frozen Promise Frozen
for expenses worker thesewould costs greater likely (40than year remain revenue, versus in 70 the funds years, employer were etc.). drawn plan. down in a manner that left the equity
March 25, 1999
program.
45%
xiWc will also in control year for t (e.g., the impact 100 percent of both before-tax match on andemployee after-tax employee contributions contributions. up to the Notefirst this 3 is percent likely to
Distribution of Long-Range Actuarial Balances
Were there to be a government-provided match, however, then workers in an employer
1098 $16,124 $16,124 $16,124 $16,124
• Method One: Assume any NHCE that is "at risk" drops out of the employer's 40Ilk)
In terms of the number of participants impacted, the plans estimated to be impacted under
percentage the same. Therefore, the investment in equities had a chance for long-term returns.
be extremely important if the final government plan design involves after-tax employee contributions.
S ofta employee tement compensation Before the H plus ouse 50 C percent ommitt match ee on on additional Ways and employee Means
25% 100% --
plan with no match might be better off in the USA, depending on the level of the match and
FICA Surplus Only
plan while HCEs continue their current contribution.
Abt. _, i
xi,N.B.: some However, plans involve to thea more extent complex that a function, new mandatory possibly incorporating universal government the sponsor's program profits. were more
Lastly, method collective one covered investment 9.7 million does participants not accountatfor the all end the ofadditional 1996 (approximately start-up and 26 administrative percent of the
Equity Investment 2050 35% of ,the __ Annual $28,717 FICA$19,240 Surplus $24,697 $16,547 --a Low Male
contributions up to the next 3 percent of employee compensation), TM and
whether the match contribution is treated as taxable income or is tax-deferred.
50% of Subcommittee on Social Security
90% --
Chart 10: Percentage of 1996 401(k) Plans "At Risk" for ADP Compliance Under 50% Match
xiiiFor purposes of the 1996 data used in this analysis, the 402(g) limit was $9,500.
costs that would result from creating individual Social Security accounts, and these costs would
i
ge universe). nerous than Method employer two suggests plans, one that would the impacted expect that plans employees had 3.9 million would stop participants or reduceattheir the end of
Thiswrkrs "all or nothing" response to a governmental -- competing matching -- plans could be
• QNECs are determined as the amount of employer contribution that is provided
One use of Assuming the EBRI $600 model Transfer is oftoCo assess ntributionsthe program for Noth NHCE finance and HC outcome E, by Plan of Sizeinvesting the
ZOO
×i,.See Internal Revenue Code 80%Section -- 414(q) for a definition. Technically, the simplified definition of riCEs
2060 $31,314 $20,980 $26,931 $18,043
25%i t,300 --x-- A,.gMale
be participation 1996 signillcant. (approximately in the employer 11 percent plan. of For all 401 example, (k) participants). if the employer plan offers no match, payroll
justified on several grounds. First, HCEs may not be eligible to benefit _,__ A_from Femalea g_._ :_:_,,;ent
29% .... ._ Actuarial BaLances
regardless of employee deferral (e.g., 2 percent of compensation).
implemented annual FI('A Forbya the surplus number Small Business -ofthe design annual Joband Protection amount administrative Act of FI ofC 1996 Areasons taxes had not ,above taken the Cthe linton effect costs asadministration ofof year theend program 1996 is however unlikely for a we
700//0 i E]$50,000 ......
30% __ _ LowFemale
Hearing on
deduction each pay period and several investment options, while the government plan offers a 50
25%
used the match new definition due to potential 2to 065be moreconstraints relevant $32,700 for on predictions $21,909 adjustedof gross impact $28,124income on plans $18,843 (AGO. in the post _$30,000-$4 Second, 1996 9,999 environment. it is highly
particular to propose year what was into mentioned the equity markets in the State or into of the individual Union Message accounts and fordescribed workers. through We modeled
-- _S O-- i
60%
20° 15% /° /_/_/):Zl_ -_ L_---_--,A --_ _ ,IL_--_ _ -- High HighFerrale M,_e
Regarding 1haveGmade oals administration, available and Critto erithe aourC fo ommittee analysis r Assess finds our ingstudies that Soci a system acompleted l Secur of i personal ty to date Refor , accounts and ms offerwould our
Moreover, percent match no information up to $600 on thein 5% worker owner classification contributions, is available few investment in this database. options, and a contribution
Mr. Chairman and Members of the Committee. I appreciate this opportunity to discuss
unlikely 15° that,'o employees with salaries of at least $80,000 would leave the __ employer _,_ges plan ! for a
250 1.00 I Positive Balances "_.. 400 /
This substitution of variables would be expected to bias the results if we were attempting
(first) examples the collective in a White investment House fact in sheet. equities However, of just we thehave FICAused surplus that, plan and for (second) this analysis the FICA to show
i
2070 $34,145 $22,877 $29,367 $19,676
50% Is2s,ooo.s29,999
×v involve This accounted a number for less of distinct than 1 percent operations: of all plans in the sample. Technically, 401(k) plans now have the
once assistance each year, in carrying the worker out additional would likely studies. drop Iout have of also the attached employer to plan this and statement move funds a set of to slides the
50 percent match on only $600 (at most 0.75 percent of compensation).
Social Security's goals 5% and criteria for assessing reforms. J
to analyze contribution _°%behavior _j4t-J at the margin for the types of formulae seen in actual 401(k)
surplus how much plusofinterest a difference payments plan on design the existing can make trust andfund whybalance the administration (which would is wise remain to work in special- hard
[
flexibility to use the ADP generated by NHCEs in the previous year to test whether the current year's ADP for
400/0 [_ $20,000-$24,999
intended to add detail to some of the points contained in my statement, including the results of a
govemmei_t 20%% plan in order to get the match. ..... : ;
10% 0% _ - , .... X high wages
2(}75 $32,655 $21,878 By $30,666 $20,546
plans where there is expected to be a significant decrease in contribution incentives after {
issue on theU.S. design Treasury issue. bonds). Using the actuarial assumptions from the1998 Social Security
HCEs is too high. This modification was not included in the current analysis since the database is temporarily
The ADPs are recomputed and the percentage of plans that would be in violation of
195:3 196.3 1973 1983 1993 2003 2013 2023
30% BB$15,000"$19 999 ,
1998 survcy • First, of small employer employers deduction to determine of payrollattitudes taxes and on personal transmittalaccounts. to a third party, with
limited to 1996 1 appear contribution today as information. President of the Employee Benefit Research Institute (EBRI), a non-
approxim_tely the first 6 percent of compensation Dallas L. Sal and isbaucomplete ry ban on deferral:_ after the first
Trustcc.q Report, when the model is in deterministic mode, the FICA-surplus-only investment has
Daily Semi- Monthly Quarterly Annually
both tile basic and alternative tests (assuming no corrcctive measures were taken) arc
To the ultimate extent transmittal that the new of records plan hason thewhom worker's eachcontribution dollar belongs come to. out of taxable income,
20% ---- mSlO,OOO-S14,9o9
×,i A third method will be attempted as soon as the database is expanded to include information on eligible
$10,000 profit research )'" However, organization as long located as our here analysis in Washington reflects only DC. the EBRI relatively does small not lobby level or ofadvocate employee
5%
a USA 75-year A,lalysis actuarial balance of 0.08 percent Presiden of t taxable and C payroll; EO but if the FICA surplus plus the
tabulated and shown in Chart 9.
weekly
so 15%0 that taxes 1 thank are the not Committee deferred, then for the this balance opportunity shiftsto back appear in favor beforeofyou the today employer -and wish plan, -- you all other the
• Second, receipt of the funds by a trust company or financial intermediary.
employees that choose not 10% to contribute. Although the two methods used in these illustrations [] s s,ooo-produce s I o,oooconservative
specitSc actions, but has worked for over 20 years to provide objective data and analysis that
contributions interest from the discussed bond investment thus far (i.e., is added, no more thethan actuarial $600 per balance year),becomes this substitution positive at is 0.46 not likely
CopyrightEBRI1999 6
estimates of Recently the impact, the they Employee are not precise Benefit in that Research we are currently Institute... unable and the to observe Investment non-participant Company eligibles Institute that
things best asbeing you seek equal. to assure For example, future retirement if an employer income hassecurity. no matching contribution, a government
• Third,Source: receipt Unpublished of full information Data, Social on theSecurity employee Administration, and the amount 1998. of money that went
allows policy proposals Cha 00/0 rt 9to : P --ebe rcenevaluated. tage of 1996 401(k) Plans "At Risk" for ADP Compliance _Less Under 50% than Ma $5,000 tch,
to be significant.
percent of taxable payroll (see Chart 2).
O% i
drag the ADP for NHCEs down 4 00 _ further than ,actuarialHCEs. Balances
have completed N a two-year Assu study minfatal g Cof omp the lete 401 Migration TSP Copyright (k) market for EBRI NHC OC1999 Es w" and which None lelf fo has r HCEs yielded , by Plandetailed Size 1 individual
Employee Benefit Research Institute
program with to the a match financial couldintermediary. affect participation in the employer plan.
1953 1963 1973 1983 1993 2003 2013 2023
_SOO L
xviiTechnically, the smaller plans are more likely to have no HCEs among their participants and therefore relatively
employed
participant records (including demo_aphic information and contribution behavior) from more
2121 K Street NW, Suite 600
10% •Our Fourth, first book notice on Social to the recordkeeper Security was and published the financial in 1982intermediary i, and we have of conducted how the money much -- is i
For purposes of passing a nondiscrimination test unique to 401 (k) plans (the so-called
inmmne to the impact of a competing governmental plan on their ADP test. This influence gives way to the fact that
4O% - -
Chart 2
References
than 27,000 plans. Due to strict confidentiality standards, no information on the plan sponsor's
Why tt'ould toItbe Matter invested. if Workers Reduce Their Participation In Employer Plans?
work ii since then that has documented the critical role Social Security plays in providing income
larger ADPplans tests), appear it istoof have utmost more importance generous Washington, matches that and non-highly thus are DC less compensated 20037 likely to have employees NHCEs considered chooseto to be "at
USA ACCOI;NTS IMPACT ON EMPLOYER PLANS
risk." identity was included. However, the database does break out source of contributions (e.g.,
Allen, Jr., Everett T., Joseph J. Melone, Jerry S. Rosenbloom and Jack L. VanDerhei, Pension Planning: Pensions,
• Fifth, either investment by the intermediary or the transmittal to an investment
to the retired 35% population, Long-Range as well as Actuarial Voice: to the disabled 202/775 Balance and -6322 survivors.ofThe Investing primary goals of Social
participate in the sponsor's Source: unpublished plan. Ittabs is logical of Apr. 93 toCPS assume supplement that and if any 1990employee Survey of TSP with Participants limited
The tax laws that apply to employer plans are extensive and complex. Most relevant here
Many reform proposals now being discussed would change these goals to some degree. The
employec Profit Sharing Whenever before-tax, , and Other public Deferred employee or private Compensation after-tax, employers employer Plans,want Eighth matching, to edition, create Homewood, a qualified retirementIllinois: non-elective program, Richard they D. Irwin must , Inc.,
Security have manager. been to provide:
investiblc funds finds an alternative arrangement with a higher match rate that they may choose
Fax: 202/775-6312
are the "nondiscrimination rules," which, put simply, "test" 401(k) plans for relatively equal
critcria 1997. for assessing reforms Annual should FICA be to: Surplus in Equities
N Cop_Mght EBRI 1999 2
make contributions a number (QNECs), o f decisions. etc.) and Since wemost are currently employersworking have more on athan set of onecomputer retirementalgorithms plan, parttoof
3O%
to rcallocate some or all of their future contributions from the 401(k) plan to the USA plan. To
• Sixth, regular reporting on investment results to the recordkeeper so that account
deferrals (expressed as a percentage of compensation) between lower-paid and higher-paid
An individual accounts system that seeks to use the income tax system would be more
E-mail: salisbury@ebri.org
the classify reasoneach for plan careful by analysis the types is ofto incentives avoid causing provided harmtoto employees other programs. at various Depending contribution on how levels it
Clark, Robert • A L.foundation and 0.6 Sylvester of J. income Schieber, for "Factors all Americans Affecting Par -ticipation which it Rates has done. and Contribution Levels in 401(k)
balances can be maintained.
what extent is this likely to happen in the existing plan population? Our findings are summarized
workers. difficult to In makc general, universal for "highly and would compensated be more employees" difficult to (known enforce, as as H itCwould Es, or be those tiedpaid to over 140
Chart 4:
5%% _ -
0%
• Determine whether a reform proposal supports these goals, or changes them, and whether
is (e.g., Plans," designed, ain2Olivia percent 255a /o Universal S. Mitchell QNEC Savings and plusSylvester lnternet: 100Account percent J. Schieber, match http: (USA) eds. //www.EBRi.o for could Living the be with first designed Defined 3 r percent g Contributio toof avoid compensation n adverse Pensions. Remaking and a 50 [
below.
•• Seventh A nearly , a adequate system for income servicing for the thelowest-income worker's account Americans and providing - whichinformation it does. on
$80,000 million a individuals year a 1-9 or more) rather b t0-24 to than contribute six million d 25-49 to a retirement employers, d 50-99plan, as isthe currently e 100-500 "non-highly the case. t>500 compensated total
Distribution of Long-Range Actuarial Balances
Responsibili proposed o'fiJr Retire changes ment (Philadelphia: are acceptable. University of Pennsylvania Press, 1998).
percent match for the next 3 percent of compensation).
consequences for employer plans, or it could potentially cause nondiscrimination problems for a
plan size (number of participants)
the I account, the investments, and details on choice.
employees" • Income (NHCEs, protection or those against paid less the than "risk" $80,000 of living a year) much also longer must than do so. one v Further, plans, 'i or what the the
HCA Surplus and Interest
20% *
• Dctem-dnc whether the reform fully utilizes the present administrative and recordkeeping
Kusko Andrea L., James M. Poterba, David W. Wilcox. Employee Decisions with Respect to 401(70 Plans." Evidence
significant percentage of employer plans. It is premature to predict what the eventual outcome
o2 i
Methodology actuarial tables suggest, by paying a life annuity that is indexed for inflation i - which
HCEs can contribute to the plan is a direct function of what the NHCEs contribute. This means
• Source: Eighth, EBRI tabuleducation ations based onof EBRI the /ICl Participant-Directed worker on the Retirement personal Plan Data account Collectionsystem, Project. See what "investments"
Basing an individual accounts system on Federal Thrift Plan (TSP) or private 401(k)
From hufividual-LeveI Data. NBER Working Paper No. 4635, 1994
structure, and if not, w-hether the reform proposal is feasible for implementation.
of these When "testingcompleted, problems" this may analysis be on will a plan-specific provide unique basis;insight however, into most how participating sponsors would need
I
accompanying text for caveats and assumptions.
it does.
The analysis consisted of the following steps:
Benefit AEffects major are, what cost of Individual of a bond, any retirement a Accounts stock, and program Ma cash rch are is 25 ,the , and 1ultimate 999 on what cost actions of paying they can benefits. or must Only take with
that if the lower-paid workers choose not to participate or contribute, the higher-paid workers
plans as a model is not an accurate comparison, since the covered populations are very different
15% '
• Determine whether the reform proposal changes outcomes in terms of tax levels,
to employees consider a atredesign various compensation - perhaps a drastic levelsone may- be of their expected plans, to and reactundoubtedly to various formulae some plan adopted
VanDerhei, Jack L., Russell Galer, Carol Quick and John D. Rea. "401(k) Plan Asset Allocation, Account Balances,
ZC0
A representative random sample of approximately 6,700 401(k) plans was taken from
an ultimate annuity form of payment can a personal account be compared to the present system
would bc • substantially regarding Dignity for his frozen retirees or her ,out--and individual by having there account. thewould incomebepaid no reason throughfora the govenunent employer transfer to sponsor rather the
(see Chart 6) and thus the costs ofrecordkeeping and administration also would be very
l Positive Balances _,
benefit/income levels, and life income streams.
and by the Loanemployer. Activity," EBRI It will Issue also Brief provide January the1999. basic framework for sensitivity analysis into the likely
sponsors would seriously consider the elimination of their plans. Termination of plans could
Dctermmisnc-FICA
Preliminary results
in terms the EBRI of economic /IC1 x?2 401 (k) security. database _0s Social in which Security D,:.:m-_mi_t,c there _ICacurrently was sufficient spends information over 90 percent to determine of its ] ! total
differcnt. tThis 0% than -- is requiring most true family of wage members levels, to and askthus other thefamily expected members amountfor ofdirect annual assistance. contributions
retirement •When plan. Ninth, assessing a system reform for communicating proposals against ultimate the current annuity Social options Security and then system, paying it isthe
Yakoboski, Paul J. and Jack L. VanDerhei, "Contribution Rates and Plan Features: An Analysis of Large 401(k)
4:14 Surplus Only ] !
impact of modifications in the 415 (c) and/or 402(g) limits.
reduce • Determine retirement savings, whether the the opposite reform proposal of the intended reduces result risk inofthe USA system--or account creation. increases risks.
employee deferral percentages and employer match rates for at least 90 percent of the
administrative 'expcnse on annuitization and benefit payments. i
• annuities. A level of Each taxation of these that permits steps involves a pay-as-you costs, go with program most estimates with a small provided reserve. to date
important per account. to note Again, thatusing an individual the TSP account or 401(k)provides model for aproportional individual Social benefit, Security meaning accounts an equal
Chart 9 illustrates the estimated percentage of 401(k) plans that would be in violation of
Plan Data." EBRI Issue Brief, June 1996.
The primary employer design factors for retirement programs are as follows:
• DcteNninc _Gwhether the reform proposal strengthens, weakens, or has no affect on the
participants 5°,3 in the plan.
would involve much higher costs for employers, workers, and the government than is incurred
As aleaving matter out of public many policy of these , Congress costs, or could providing also ranges make this based issue upon irrelevant frequency by rof epeal choice of
percentage • of A benefit pay contribution that grows atin each real income value by level. passing As on a result productivity , the redistribution increases and in the life-style current
the ADP tests assuming any NNCE that is "at risk" drops out of the employer's 401(k) plan
Given the political timeline, we do not have the luxury of completing the pattern
existing system.
Most Average analysesmatch to date rates of individual for each participant accounts do with not the include requisite an estimate information of this were cost. As
the iunder Social nondiscrimination Security: thc pres designed increases ePerspectives nt Social into to rules retirees the Security on that Preserving system. with apply program. aThose the specifically benefit System, studies formula ISBN tomake 401 0-86643-028-8 that (k) clear targets plans, that vi replacement the If this more happened, responsive of finalthe income the level,
system, or the "non-proportional" delivery of benefits, is not reinforced by individual accounts.
while 1-ICEs continue their current contribution. Overall, 26 percent of all private 401 (k) plans
Stochastic Avcrag¢-FlCA
recognition algorithms necessary to identify the contribution formulae of 27,000 plans. However,
Possible USA Features Option I Option lI
• Determine 0% whether the affected public supports any fundamental reforms.
shown ii Forcomputed. example, on Chart "Retirement 7,0__ administrative in the 21_tCentury..Ready cost canI substantially or Not" (1994, reduce ISBN benefit 0-86643-081-4), levels. which Even deals without with the
The views expressed in this statement are solely those of the author and should not be attributed to the Employee
_,oo _o,.,_s f_ _- __ \ !
ofpa Thiscticipation is shown system, graphically by the the NHCE more in expensive. Cgroup hart 8,would as thenot higher matter an to individual's the HCE group. income,But thesince higher repeal the is
as opposed 43-1 8 ] I to a constant level of purchasing power. (This increase Su_luaandlntcrc in st real purchasing
arc expected to be impacted under this assumption. The percentage of plans is obviously a
a 1 9 b 10 24 d 25-49 d 50-99 e 100-500 f >500 total
we have taken a random sample of 6,700 plans to provide some initial insights into this policy.
1. Employer Contributions -ZgO _ TaxableNow Tax Deferred R_th Perceamle j
Benefit preparation Research of theInstitute baby I boom , or the for retirement. EBRI Education and Research Fund, 4)its 97 officers, trustees, sponsors, or staff, or to
annuity Eachcost, participant a reccnt was analysis categorized by the CATO as to whether Institutethey suggested were. a highly costs of compensated $55 to $115employee per worker
unlikely, we provide, analysis. St.basdc Average-FlCA I }1]
proportion of power total is benefits shown that in Chart derive 1. from The chart the individual also shows account. that increases in real purchasing
function of plan size, with only 15 percent of plans with 1-9 participants being impacted,
Plan size (number of participants)
"' ISBN7125.A783
While this is just a small fraction of the year-end 1996 information we have collected, we believe
2. Worker Contributions Taxable Now Tax Deferred 1
12' ......... SurNua O11_........................................ ]l
the Our t{t:;RI-t!RF 1997 book, American"Assessing Savings Education Social Security Council. Reform The Employee Alternatives, Benefit Research ''iii contains Institute a first is achapter nonprofit,
per year (HCE) foror just non-highly the cost of compensated account administration employee (NHCE). and funds ×'vinvestment. This did not include
Source: EBRI tabulations based oc_EBRI/ICI Participant-Directed IRettrement Plan Data Collection Project. See accompanyir_g texl for
400 Actuarial Balances :
power would remain, even if benefits were cut to allow for full funding under the
increasing ivISBN 0-86643-092-X to 35 percent of the plans with 50-99 participants. The impact decreases for larger
nonpartisan it is still much public more caveats policyand comprehensive research assumptions organization thanthat any does other not research lobby or take database positions inon existence, legislative ix proposals.
which3.provides Investment a detailed Earnings list of sub-questions Taxable Now in each of Tax these Deferred areas. Our just-released 1999
Each participant was categorized as being "at risk" or not. We defined a participant
Administrative Conclusions
any expcnsc tbr (1) education, or (2) compliance. The CATO analysis notes that any frequent
The Clinton administration, it must be noted, has been meeting with many groups in an
vTechnically, present it is possible levelfor ofplan the sponsors FICA tax.) to also use non-elective contributions to satisfy these tests as long as
plans; slightly less than 25 percent of the plans with more than 500 participants were estimated to
4C0
book, "Beyond Ideology: Are Individual Social Security Accounts Feasible?'"" applies this
to 4.be Matching in the former Contributions category if the Amount employer of average Amount match rate of C was ontribution less than 50 percent.
reporting these contributions to workers, satisfyfrequent special vesting investment and withdrawal changes,restrictions. loans, or other features could substantially
effort to complete the design of its USA program in a form that would not have an adverse
be inapactcd. X'"
A system of personal accounts that applies to all who now pay Social Security taxes can
It is important to note that for the preliminary Negative Balances analysis we are substituting the participant-
methodology to individual account proposals.
Match (50%; Matched (x% of pay or some
• Alethod Two: Allow the substitution to be quantified.
incr ,,iWhile ease the costs. analysis Average A below recent deferral tbcuses report percentages exclusively from the on Heritage were the ADP computed Foundation tests, a complete for each notes analysis plan that for of the the thesystem public HCEspolicy could (ADPu) make and
impact on employer plans. -5 (710................ It is our hope that this good-faith effort by the administration will
only specific ftmction average at reasonable employer match administrative for the marginal cost if it match. takes _ full The advantage analysis of conducted the present by Yakoboski system of
implications would require similar analysis 10 on0%) employee after-tax flat and employer amount) matching contributions as well as
use the of Electronic NHCEs (ADPN). Funds Transfers to hold down employer costs, and suggested credit bureaus as
lead to design decisions that minimize or avoid any adverse impact on employer-based plans. Vii
Chart Given 10 illustrates that a significant the estimated percentage percentage of NHCEs of 401(k) are deferring plans thatmore would than be $600, in violation a of
and VanDcrhei (1996) and Kusko, Poterba and Wilcox (1994) both demonstrate the need to
payroll the multiple tax use deposits. test and the Over potential 5 million for 401(k) employers sponsors still to adopt file the all newly records implemented on paper, safe andharbors. many make See
Also, the EBRI-SSASIM2 model that we have developed allows comparisons making use of
5. Tinting of End of Year Each Pay Period
the model Butfor Each theindividual real planworld wasSocial tested is notSecurity deterministic, to see ifaccount it passed it administration. isthe dynamic. basic ADP Therefore, test: MostADPH employers the model _