Retirement Savings Plans

SEMA's Position

About 70% of small business workers are not covered by retirement plans.  There are many reasons small businesses shy away from retirement plans: revenue is too uncertain to commit to a plan; administrative costs are too high; too much paperwork and too many government regulations; and required company contributions are too severe.  SEMA supports legislation that would help offset program costs on small businesses, provide guidance in plan construction for administrative ease, and establish clear regulations to govern the program.

Status

Changes Via 2001 Law:  The $1.35 trillion tax cut signed into law in June 2001 addressed many of the points SEMA has advocated.  The law raises the contribution limits for traditional and Roth IRAs, 401(k) and SIMPLE retirement plans.  It provides faster vesting rights for 401(k) and similar employer retirement plans.  The law makes it easier for workers to convert their plans when they change jobs.  Moreover, small employers (less than 100 workers) will be able to claim a non-refundable tax credit in connection with adopting new retirement plans.  The credit will apply to 50% of the first $1,000 of administrative “start-up” expenses for the first three years.  
 
Changes Via 2006 Law:  After years of Congressional work, in August President Bush signed into law legislation overhauling pension funding rules.  It is intended to reinforce beleaguered corporate pension programs, especially for the larger companies that have gone bankrupt, and to stabilize the deficit-ridden federal program that insures them, the Pension Benefit Guaranty Corporation.  The new law will give most companies managing single-employer traditional pensions (defined-benefit plans) seven years to fully fund them beginning in 2008.  Airlines struggling through bankruptcy such as Northwest and Delta will be provided additional time.  Nearly 35 million workers are covered by defined benefit pension programs and there is currently an estimated $450 billion asset shortfall.  Highlights include:

• In general, companies will have to fund 100 percent of pension liabilities, up from 90 percent under current law, through calculations that use a corporate bond yield curve.
• Companies with underfunded plans will have seven years to make up the underfunding.
• Requires more notification to plan participants of funding problems.
• Prohibits employers and unions from increasing pension benefits from single-employer plans that are less than 80 percent funded, unless the additional benefits are paid for immediately.
• Rules governing how companies measure their pension liabilities will be revised to better reflect when promised benefits will be paid, thus factoring in the age of a company’s workforce.
• New restrictions will be imposed on deferred-compensation arrangements for executives of companies with severely underfunded pension plans.
• Allows companies to automatically enroll workers in a 401(k) plan to encourage retirement savings.  Workers could then opt-out.  (This reverses current law.)  It would also make catch-up contributions permanent.
• Gives workers who participate in retirement savings programs greater access to investment advice to help them manage their retirement savings.
• • Requires workers be given quarterly benefit statements showing the value of their assets, explaining their right to diversify their investments, and highlighting the importance of maintaining a diversified portfolio.

Social Security Reform:  Structural reform of the Social Security system is a priority since the program cannot be sustained with current tax revenues and projected outlays.  It is the primary domestic agenda item for President Bush; however, his proposal to allow workers to invest a portion of their contributions in the stock market has met enormous resistance and set back the debate in Congress.  Lawmakers on Capitol Hill have put the proposal aside for now.  Other “hot-button” issues include raising the retirement age and raising the tax contribution ceiling.  The politicians don’t want to get burned on Social Security reform but the issue will only become more difficult to address with the passage of time.