2 3 5 4 The sav the after-tax n ings pro atup re os oa f th ls will disco e LSA anWitness d RSA desirab urage taDiscl rgeted retirement sav o lsure e and m Stateme ight ch nt, oose to increase ings, however. their a For e nm nual sa ployees not vings as The Bush Administration’s Proposal to End Double-Taxation of Dividends: 5 a resu participating in a 401(k) pla lt. n offering an employer match, the LSA would often be the first place to pursuant to Clause 2(g)(4) of Rule XI of the Rules of the House: put t he first $7,500 per family member due to the lack of restrictions on when a participant can take a Impact on Retirement Accounts distribution as However, therwell as the e are also lack reasons to of early withdra hypothesiz we al that the penalties. Si savings nce t pr his a oposal m mount is m ay not increase ore than mototal st 2 Am saviericans save in a yea ngs. First, most taxpay r in a ern s al y form ready , it could absorb all sa have both the regular IR vings A a for m nd tho est. Roth IRA available but few Statement by Dallas Salisbury, president and CEO 6 have chosen to contribute to either. Given that Roth IRAs need to satisfy a five-year holding Employee Benefit Research Institute It i requ s irem a neen xt s t that d tep ino a l es o nng ot apply to -term pol LSAs, t icy pro hg ere m ressia on y b to ew m ao rre of a d incen dti em ves anf do for th r savie latter, ngs othbu er th t it mig an fo hr t retirement. simply capture Un sh til th ort-e m term id savi 199ngs 0s th . Sec e inocen nd, i tiv f t es he propo were offered sal were adop for retirem ted,e it wou nt savilng d lik s oely lead nly. Th to ese House Ways and Means Committee in term cen in tiv ates were often ion of existin g reinforced defined c th ont ro riugh buti early withd on plans, esrpeci awal alp ly e am nalties an ong thd, e i sm n th alle case employ ofers. Si certain nce 401(k) March 6, 2003 7 T – 138 • m The Witne em oni ploy es, i ee co n-se ss: nt rvi rice wi butions thd are rawa mlo s were stly dri pe ven rm by itted i man tc o hi nng ly limit empled oy situ er cation ontrib s. utTh ions e Taxp , thisayer woul Relief Act of d not only 19 deprive 97 cr a signi eated a fnew icant ta num x-faber vore of em d savi ployees from ngs vehicle cal receiving led a Roth em IR ployer c A that i ont nributions, but it troduced the concep would likely t of “no 3 Dallas Salisbury is president and CEO of the Employee Benefit Research Institute (EBRI), d cau edu se t ction hem ,” to “no di tax on scontinu withd e their own rawal” to co retiremen ntributions as t plann well. ing. Then came 529 plans for college savings, Thank you, Mr. Chairman, for allowing me this opportunity to share observations on how the Washington, DC. Salisbury has headed the Institute since its founding in 1978. Individual Development Accounts, etc. Now, the proposed Lifetime Savings Account would allow president’s plan to end double taxation of many dividend payments would impact America’s pension fo Rega r wi rdless thdraw of the al for a impa ny pu ct o rpos n tota e witl sav houti t ng ax s, so or penal me w ty o at rkers a any tre likely to ime. lose the valuable ancillary system. Statement before the • The Organization: benefits they derive from participating in an employer-sponsored retirement plan. Some workers It is likely that there will be will end up investing in “indivtwo idual” indivi groups that would dual accounts as oppose forego the LSA for at leas d to group (or em t a portion ployer-sponsore of their d) It is bold as a move in policy. Th Com is is mp ittee articu on larly true when Ways and Me it ans is combined with the savings proposals EBRI is a private, nonprofit, nonpartisan public policy research organization based in Washington, ann indivi ual dual accounts savings. First, those either due to who the have a conside retirem rations ent plan at mentioned a work wi bove th a m or be atcause t ching co he em ntrib ployer ution an has d are for LSA, RSA, and the Roth 401(k) acceleration to 2004. These last provisions essentially allow low- DC. Founded in 1978, its mission is to contribute to, to encourage, and to enhance the development of United States House of Representatives willing to have chosen not to sp li om ns io ted access r a plan into the m the new e oney a nviro re likel nmenty to c . Thes hoose t e indio vi particip duals ma aty e in the lose th401(k) plan e benefit of having and moderate-income individuals to save with a 0% tax rate on interest, dividends, and capital gains. sound employee benefit programs and sound public policy through objective research and education. in a fiduciary sc stead. Second reen , th for “a ose m ppropria otivated te” inv by the ab estmen ility to ts an m d con ake b tinu efoare-tax lly mo con nito tribu r the tio fund ns to h s. Moreo ave anv immed er, iate These are the groups most likely to own mutual funds versus individual securities, and the most likely EBRI does not lobby and does not take positions on legislative proposals. tax empl re oy du er-s ctio pn on wso ore uld lik d edely pref ucational er p th rog e 4 ram 01(s k) p wolul an also. Th d likely no is t be later pr gro ovided up is lik , at least ely to to be theh sam igh-e in ext com ent e , if to have money in regular savings accounts versus other vehicles due to their low savings rates. Total in thd e em ividp ula ols who yee were to believ sav e th eey ouwill b tside o ef in a the h qu igh alified er tax m ba rrket acke . T t wh hien th s coul ey d al with so draw th result in e m hig oh ner ey o invest r intend ment The E exclusi do ucation n would and Researc not likely m h ove t Fund (ER hem t F o), es wartablishe d the pud in rchase 197 of 9, di pe vi rf de ornd ms -pa thy e ch ing st aritab ocks le, edu , but rat catio her n al, to leave t and service he ac feecount to s, which would serve to their non-taxabl lower ov e estate. erall retirement wealth. an would create i d scientific fu ndi nc ffe tion rence s of th . e Institute. EBRI-ERF is a tax-exempt organization (under IRC Sec. 501(c)(3)) supported by contributions and grants. EBRI-ERF is not a private foundation (as defined by Hearing The savings proposal could cause some small emp ### loyers to terminate retirement plans and others IRC Sec. It is likely to have 509(a)(3) only ). a limited impact in any direction on most current retirement and savings on not to start them. This is especially likely to happen with small plans, since the employer could put plan participants. Once the Roth 401(k) is in place in 2006, under current law, this becomes even away EBRI $15,- 0E 0RF h 0 for ahi s a nu m/hersel mber f wi of tpr h og sim raim las r am : ounts for a spouse and each child without having to deal more the case. A future exclusion from any taxes on any income or capital gains will clearly trump a The Bush Administration’s Proposal to End Double-Taxation of Dividends: with administrative details of qualified plans or the employer contributions necessary to make a safe- stand-alone dividend exclusion. Some small employers could decide to not have a plan and simply Impact on Retirement Accounts American Savings Education Council harbor 3% contribution, a safe harbor matching contributions, or to induce sufficient contributions move their money into a portfolio of high-dividend stocks. However, the Roth 401(k) would provide a ® Choose to Save Education Program from the NHCEs to pass the nondiscrimination tests. Moreover, at least initially, the $15,000 is greater better means of exclusion for these individuals, since they could also exclude interest and capital gains Consumer Health Education Council than the $12,000 under Sec. 402(g), which would still apply to ERSAs. income. Since the theory of ending a plan due to this provision means a willingness to save after tax- Defined Contribution Research Program dollars, the Roth 401(k) can be seen as a reasonable alternative for first dollars. The small employer Fellows Program Testimony of Certain elements of the savings proposal would work toward increasing total savings. First, the might then also contribute to an LSA for family members. Roth 401(k) s, LSAs, and RSAs would also Health Confidence Survey Program LSA and the RSA would apply to all persons with identical provisions so that advertising them would be more attractive options to small employers than simply moving their money into high-dividend Health Security/Quality Research Program Dallas L. Salisbury be easy and clear and much confusion would be eliminated. The universal eligibility and relatively stock portfolios. 1 Policy Forums President and CEO, Employee Benefit Research Institute simple design of the attendant financial instruments should increase both the supply and demand for Retirement Confidence Survey Program these options. Second, the increased flexibility with respect to withdrawal access should also appeal to It is unlikely that a dividend tax exclusion would lead to significant asset shifting for most Retirement Security Research Program Washington, DC those with limited resources who prefer to have ready access to liquid assets in the case of financial individuals. Most defined contribution plan participants have small account balances, as most 4 Social Security Research Program emergencies. Third, taxpayers who believe their personal long-term tax rates will increase would find Americans have little in savings. The administration’s proposal should not have an effect on lower- Education Programs--Policy Forums, Briefings, Round Tables March 6, 2003 compensated workers, as these workers are unlikely to have saved enough at any one time to make a Publication Programs--printed and online stock purchase worthwhile, and the tax deduction is going to far outweigh any savings in dividends EBRI Issue Briefs, EBRI Notes, EBRI Databook on Employee Benefits, over their lifetimes and at withdrawal time. EBRI Health Benefits Databook, Fundamentals of Employee Benefit Programs, Policy 2 In the calendar year Stud1999 ies data from the EBRI/ICI Participant-Directed Retirement Plan Data Collection Even with a dividend tax exclusion, higher-compensated workers would still want an employer- Project, the average before-tax 401(k) participant contribution as a percentage of salary was 6.8 percent. sponsored retirement plan, particularly if there is a match. These workers can always diversify • Contracts: The average total participant contribution as a percentage of salary was 6.9 percent. Based on an average into bonds in the retirement accounts and stocks in nontax-favored settings. Furthermore, if the annual participant salar y of $44,187 , this produces an average annual before-tax contribution of $3,004, or retirement plan fees are subsidized by the employer, this may mitigate the benefits of not having EBRI does not have any contracts with the federal government in 2003, and did not in 2002, 2001, or 5 $3 The ,04r8 e a ifr aft e m er a-ny reasons tax contribut why ions a an indivi re incldual taxpaye uded. See Sara r m h aH y b ole dliev en a en th d Jac eir tax brack k VanDeet rhei wo , “C uld in ontri crease later i bution n dividends taxed, since dividends are running around 2 to 3 percent of value. 1999. life ev Behavi en or if th of 40 e 1( tax k) rates Planrem Part aiic ni static. pants.” IC HoIwev Perspective er, growi, Vol ng bu . dg 7, no. 4; et deficits (an and EBRI Iss d the prom ue Bris ief es for Medicare no. 238 an (Ind Med vestmi ecaid nt Co alread mpany in law y Institufor th te and Em e elde prly), wh loyee Ben ich ar efit Research In e growing rap stitu idly, te, Octob may prov er id 2001 e ad ). ditional incentive It is unlikely the administration’s proposal will cause a large number of people to change the way for individuals to choose the after-tax contributions. 3 1 they invest. It appears more to be just a tax “break” for stock owners, and for many it will be quite Technically, after-tax contributions and recovery of the cost basis tax-free were quite common before EBRI is a private, nonprofit, nonpartisan public policy research organization based in Washington, 6 small. At this point it is uncertain whether this would really have an effect on mutual fund providers. 40 O 1n (lk y) 5. plans 3 pe.rc Ho ent we ofver wo , Rot rkers h IRAs contri also bute allo d to w for tax-free a deductible IR with A in drawal of i 1998. Crn ai vg C estm opel enta in ndco , “IR me. A Assets and DC. Founded in 1978, its mission is to contribute to, to encourage, and to enhance the development of If, at some point in the future, corporations decided to significantly increase their dividend payouts, Characteristics of IRA Owners,” EBRI Notes, no. 12, (December 2002). 4 sound employee benefit programs and sound public policy through objective research and education. Holden and VanDerhei show that a participant in a plan offering loans was expected to contribute 0.6 this analysis would change. But that is unlikely (certainly in the current economic environment), and 7 EBRI does not lobby and does not take positions on legislative proposals. perce Jackn Va tage nD per oih ne t m i and ore o Crfai hi gs C or opel her sal and. “ ary A t be o thavi he 4oral 01(k) m p odel lan th foan r p a p redi ac rtic tinip g an em t with ployee co no bo ntrrowing ributions to stock appreciation will always be important. 4 pri 01( vik) leges. Sar plans.” a N h Hol orth d Ameri en anc d Jack Va an Actuari nDe al J rhe ourn i, “C al ( on Ftir rist Quar bution ter Be,havi 2001) or o . f 401(k) Plan Participants.”