Introduction 3. the need to access money for emergencies 4. whether or not the employer offers a match • • Rega Th rdless ank you of th , M e im r. Ch pact o airm n to antal sav , for allo ing w si, some work ng me this oers ar pporte lik unity to ely to sh lo arse e ob thserv e vaatio luabns le ancillary b on how the ep nr eesi fits th deney t’s derive f plan t rom o e part nd d ico iubl patie t ng i axat n a io nn em ofpl m oy any er-s di pvi ons deo nrd ed pay ret m irent ems ent wo pl ul an. d i m So pact me wo Am rke erirca’s s wil pe l end nsiou np sy in st vest emi . ng in “individual” individual accounts as opposed to group (or employer-sponsored) individual accounts either due to • A brief comment on terminology: I am including the proposed dividend exclusion, deemed dividend the considerations mentioned above or because the employer has chosen not to sponsor a plan in the new treatment and the recent expansion to include annuities in my comments. I will refer to it generically as the environment. These individuals may lose the benefit of having a fiduciary screen for “appropriate” investments “dividend exclusion proposal” below. and continually monitor the funds. Moreover, employer-sponsored educational programs would likely not be provided, at least to the same extent, if the employee were to save outside of the qualified market. This could Analysis also result in higher investment and service fees, which would serve to lower overall retirement wealth. T-138 • The dividend exclusion proposal is also likely to have an impact on IRAs – both regular and Roth versions. The • I believe the major impact of the dividend exclusion proposal on qualified defined contribution plans will Revised ratiofo nacu le s fo on r t th he lik e follo ely d wing ecrease in three areas: future contributions to these vehicles is that investors in IRAs who won't see the tax benefits for years might shift more money into taxable accounts. The latter would have the benefit both • Employers that may terminate existing arrangements of tax free dividends as well as capital gains taxed at only a 20 percent rate. However, this is unlikely to impact • Employers that may have started a new plan had the proposal not been adopted a large percentage of individuals as only 5.3 percent of workers contributed to a deductible IRA in 1998. • Employees that would be offered qualified plan coverage but choose to forgo it for non-plan investments Conclusion • There will obviously be some plan sponsors (particularly among small businesses) that are so close to the Statement Before The margin as to whether they should offer a qualified plan that when the after-tax financial outcome of the Committee on Ways and Means • Mr. Chairman, having done our own preliminary analysis and having read those produced by others, we are next best alternative (i.e., have the owner forgo any contributions and declare a bonus for himself of an United States House of Representatives unabl equi e toval ma eke an e nt amount stim ) i am teprove as to t s h vi e e a di xte vi nt de to n w d e hx icl ch t usi ho e ndi itvi w den oul dd ebe xclsu usffi ioci n p en ro t t po o t sal ips t h wo e sca uld ha les t rm owa qual rds ified retirement plans as there are too many unknown parameters. termination of the plan. I do not mean to imply that personal enrichment is the only reason that qualified • EBRI’s latest retirement plans are Issue Brief no offetred by sm es 18% retiremen all employers. t plan pHowe articipve atio r, th n am e m oa nth g em ema ptlics o oyers f th with e co less t st/ben han 10 efit trad eoff for empla large oyees in num 20b 01 er of sm . This all plans figure hamay be suffici s increased by 50 ently pe m rcent odifi since 1991. There ed to result in a signi have also been ficant number of dramatic increases termin in atio particip ns. Of atio cou n rates rse thfo e real c r the 10 onc -2 ern is 4 and exactly how m the 25-99 empl aoy ny of t ee fih rm ese s an plans a d is in re the contrrast e an wi d is the th thei loss r la of rger firm count benefie ts r f pa ort r t s t he hiat r em displ ploy ayees si ed onl gni y m fii cant nor i ? nThe crease re i ss . no Are data thba ese se that I am groups big e aware nougof t h (eh nat ca ough n pe provide t ople) to h is justify Hearing not desti oinm g s ate b ome utth this is on ing for ale l to afxpay the q ers t uestio hatn w s th oul at d n be a eeds to n autb oem an atswered ic benefi bt e f fore fi or stoc na k i l an nvest alysis orso - f n th ois propo t somethi sal can ng that requires actio be providn? ed . On • • Howe It is un ver, if lik one we ely that th re conce e var st m ned awith the jority of pot plan ential te particip rmination problem ants will see their they coul plans termin d mitigat ated as a resu e it by accelera lt of this ting The Bush Administration’s Proposal to End Double Taxation of Dividends: proposal. However, one should not minimize the potential problems that may be faced by plan sponsor the implementation date of Roth 401(k) plans to 2004 to coincide with the time when plan sponsors would first Impact on Retirement Accounts begin t since o co no nsi n- dhi er t gh hle y i com nvest pensat ment st ed em rategi ples oy an ees m d pr ao yduct choso l se ik (l elo yg tio cal be c ly or reat ot ed he as a rwisres e) tu ol to of pt t o hu e t di ofvi a de 40 n1( d e kx ) cl plusi an i on n favor of non-qualified investments which may make ADP testing more difficult. Although it is also proposal as a viable alternative to qualified plans. Small employers want sheltered income and increased appreciation and als possible that the d o want t ividend otal tax exem proposal will m ption. akIn wh e ADP testing ich case th easier as t e Roth 40 he 1(k hi)g wo hly co uld m be p a m ensated ore attractiv employees are e more likely to contribute to the match level and then invest outside than the average employee stop alternative to the small plan sponsor. investing and invest on the outside. • Congress should not limit its concern merely to existing plans however as it is quite likely that there may be employers that would have started a new plan had the proposal not been adopted. However, I believe this would have a relatively short window as a result of the EGTRRA 2001 provisions that provided for 401(k) Testimony of plans to allow participants to choose to allocate all or a portion of their contributions to after-tax “Roth contributions” beginning in 2006 and esca Dallas L. Salisbury pe taxation on either principal or investment income when benefits are received. It would appear that many plan sponsors may find the Roth 401(k) to be a better President and CEO, Employee Benefit Research Institute option than forgoing a qualified plan and taking advantage of the dividend exclusion. I believe many Washington, D.C. potential sponsors would not choose to make contributions on an after tax basis just to get a dividend March 6, 2003 exclusion when they can get a full tax exemption under a Roth 401(k) plan. • While the employer is under no requirement to allow participants to make after tax Roth contributions, it is likely that both Roth and traditional 401(k) provisions would be provided by most sponsors (especially among small employers) in an attempt to optimize benefit delivery for all of the employees. This results from the fact that some employees anticipate their marginal tax rate will increase between now and eventual time of payment (in which case a Roth contribution is preferable) while others anticipate it will decrease and therefore prefer a traditional 401(k) contribution. • In addition to either causing the termination of existing plans or the suppression of new plans, the dividend EBRI is a private, nonprofit, nonpartisan public policy research organization based in exclusion proposal could also impact employees that would still be offered qualified plan coverage but Washington, D.C. Founded in 1978, its m choose to forgo it for non-plan investmentis. The ssion is to list of contribute to, to enc decision variables in maourage, and to enhance king this choice is obviously specific to each individual but some of the more important determinants are likely to be: the development of sound employee benefit programs and sound public policy through objective 1. after tax vs. before tax contributions (both from a financial and psychological perspective) research and education. EBRI does not lobby and does not take positions on legislative 2. the individuals expectations for tax rates over time proposals.