Automatic IRAS: Lower-Earning Households Could Realize Increases in Retirement Income
Synopsis "Automatic IRAS: Lower-Earning Households Could Realize Increases in Retirement Income"
According to one study, in 2011, 54 percent of wage and salary workers aged 21-64 worked for an employer that sponsored a pension plan, such as a defined benefit (DB) plan or a DC plan, but only about 45 percent of wage and salary workers aged 21-64 actually participated in the plan. DB plans provide periodic benefits in retirement that are generally based on employees' salaries and years of service. Employers may also choose to sponsor DC plans, under which both employers and employees can make contributions to the plan. Distributions in retirement are, in turn, based on contributions and investment returns in these accounts.Private sector employer-sponsored DB and DC plans are generally subject to the Employee Retirement Income Security Act of 1974 (ERISA), as amended, which establishes standards for private sector pension plans and sets forth protections for participants in these plans. The Department of Labor's Employee Benefits Security Administration (EBSA) generally administers and enforces the Title I provisions of ERISA. These employer-sponsored plans must also meet certain requirements in the Internal Revenue Code (IRC), which are enforced by the Internal Revenue Service (IRS).Individuals can also save for retirement through IRAs, which allow individuals to make contributions for retirement regardless of whether they are covered by an employer-sponsored plan. The IRS has primary responsibility for ensuring that IRAs meet IRC requirements necessary to qualify for preferential tax treatment.Employers are continuing to shift away from sponsoring DB plans toward sponsoring DC plans. Data from the Department of Labor show that over the past few decades, DC plans have become the predominant plan type offered by private sector employers. Indeed, in 2010, over 90 percent of all employer-sponsored plans were DC plans. IRAs have also grown in importance in recent years and are a key retirement savings vehicle for many individuals. According to data from the Investment Company Institute, in the first quarter of 2013, IRA assets represented a larger portion of total U.S. retirement assets than 401(k) plans, the main type of DC plan. Specifically, IRA assets totaled almost $5.7 trillion, which represents about 27 percent of U.S retirement assets. In comparison, 401(k) assets accounted for about $3.8 trillion, or 18 percent, of U.S. retirement assets. Rollovers from 401(k) plans and other employer-sponsored plans are the predominant source of contributions to IRAs. Approximately 95 percent of money contributed to traditional IRAs in 2008 was attributable to rollovers, primarily from employer-sponsored plans. The greater reliance on DC plans and IRAs in the current retirement landscape indicates that the tax incentives are increasingly relevant for promoting retirement saving.
