The retirement industry would like to extend coverage for American workers. But how best to get the job done?
By Jinny St. Goar
October 2001
Institutional Investor Magazine
It’s a sobering statistic: More than 50 percent of working Americans do not have a retirement plan.
The percentage of covered workers has actually declined slightly over the past 20 years, from 52 percent in 1979 to 49 percent in 2000, according to the Center for Retirement Research at Boston College.
“We spend more than $100 billion in forgone tax revenues to support qualified retirement savings, and that’s even higher than the mortgage interest deduction,” says Michael Calabrese, who follows pension issues for the New America Foundation, a Washington, D.C., think tank. With a $100 billion investment, Calabrese suggests, the hundreds of thousands of workers without retirement plans should not be left empty-handed.
Many industry executives agree.
For much of this year, the ERISA Advisory Council on Employee Welfare and Pension Benefit Plans, under the auspices of the Department of Labor, has been considering how to most effectively expand pension coverage. A group of council members is preparing a report that will be published in November.
The Pension Rights Center, a Washington-based consumer group, also convened a meeting on this subject in late July. It plans to issue a white paper in December. “Even when the economy was booming, participation [in pension plans] was remaining stable, or even declining,” says James Ray, chairman of the ERISA working group.
The industry’s growing interest in providing new retirement plans for low- and moderate-income people testifies to the maturity of its initial focus, the defined contribution market. About 85 percent of firms with more than 100 employees have some sort of defined contribution plan, primarily 401(k)s, reports the Profit Sharing/401(k) Council of America, a Chicago-based association representing 1,200 companies. That leaves fewer growth opportunities for product providers.
In contrast, only 15 percent of businesses with fewer than 100 employees now offer their employees a retirement plan.
“Broadly speaking, anything that’s reasonably expanding coverage, we would favor,” says John Kimpel, deputy general counsel of Fidelity Investments, which manages or administers about $400 billion in defined contribution assets. But Kimpel also counsels caution and is waiting to see the impact of the retirement reforms that were enacted as part of President Bush’s tax package.
NAF’s Calabrese and the Corporation for Enterprise Development, another Washington think tank, have both advocated a refundable tax credit for contributions to retirement accounts made by low-income individuals. The CFED has also proposed a 100 percent tax credit to financial institutions to provide 1-to-1 matches of up to $500 per qualified individual per year.
But Kimpel thinks such a tax credit would be a nonstarter on Capitol Hill. “It would be tough in the current budget climate,” he said, speaking several weeks before September 11.
Two programs are currently attempting to address the difficulties of encouraging low- and moderate-income workers to save for their retirements. Individual development accounts that received a big boost in funding under the Assets for Independence Act passed in 1998 are managed by community organizations and held at local financial institutions. These targeted savings accounts are not necessarily for retirement. For example, in Bremerton, Washington, the local housing authority sponsors an IDA program that matches savings 2-to-1 for low- and moderate-income residents of the surrounding county. These savings may be used to purchase a house or fund tuition at a community college, as well as for retirement.
The nonprofit community organizations that help manage IDAs include the Alternatives Federal Credit Union in Ithaca, New York; the Community Action Project of Tulsa County, Tulsa, Oklahoma; and the Women’s Self-Employment Project in Chicago, Illinois. Typical monthly savings are about $25, with a 2-to-1 match from the sponsoring community-based organization that is held in a separate account until the individual reaches the savings goal. At that point, the recipient pockets the group’s matching funds.
Another federal program could be used as a template for expanding pension coverage to low- and moderate-income wage earners. That’s the Thrift Savings Plan for all federal employees. Since 1987 this savings vehicle, which now boasts about $60 billion in assets, has enabled federal government workers to supplement their federal defined benefit plans. The Federal Retirement Thrift Investment Board administers the TSP and contracts with the U.S. Department of Agriculture’s National Finance Center to serve as the TSP recordkeeper.
Barclays Global Investors has been the sole manager of four investment options for these accounts - equity, small-cap equity, fixed-income and international funds - while the FRTIB manages a government securities fund.
Like other defined contribution accounts, thrift savings can be rolled into a private savings account. “These TSPs are often called IRAs on training wheels,” says NAF’s Calabrese. “The mutual fund companies don’t want small accounts, but if the federal government can shepherd these savings to about $7,500, then the accounts become more attractive [to manage and administer].”
How important is expanded retirement coverage to the typical uncovered worker? “It’s a shop-floor question,” says the ERISA advisory council’s Ray. “Do employees want pension coverage? Or would they prefer higher salaries and better health insurance?”
The Employee Benefit Research Institute in Washington recently reported that 20 percent of employees in small firms are more concerned about their salaries and health insurance. That’s the most common reason for not having a retirement plan, the institute has found.
Political obstacles have also hampered progress on pension coverage. “When universal savings accounts - similar to individual development accounts - were first proposed under the Clinton administration, we were worried that these might siphon off lower-income savers [from employer-sponsored defined contribution plans], thus jeopardizing the discrimination testing of employer-sponsored plans,” says a Senate Finance Committee staffer. Discrimination rules stipulate that plans cannot provide disproportionate benefits to higher-income workers.
A saver’s credit was included in the Bush tax package enacted in late May, but that helps only people making between $35,000 and $50,000 a year. “Any tax benefit that puts new [federal] subsidies into retirement plans is scored by the Congressional Budget Office as a new spending program,” she adds.
And that means its chances of success are slight indeed.
