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Daniel J. Peluse, CHSA®, CPFA®, AIF®, C(k)P, CBFA, CRPS®
Executive Director - Retirement Benefits Advisors
Wintrust Investments

Recently, I was afforded the opportunity to travel to Washington, DC to support the retirement plan industry and the hundreds of thousands of participants with access to retirement plans offered by businesses and business owners served by Wintrust Financial Corporation. Along with 60 colleagues from around the country, we embarked on a two-day mission to help our politicians understand the true benefit of these plans and the successful outcomes they have produced in a relatively short period of time.

As we are all aware, our nation is struggling with many issues, such as our national deficit, the debt ceiling debate, health care reform, tax reform, and most recently, the need for a continuing resolution. While these are the headlines we read and hear about every day, these all have potential implications to the retirement plan industry, IRAs, and most importantly, plan participants. Most Americans are unaware that the continued gridlock in Washington could impact their ability to save for a secure and successful retirement. As Republicans and Democrats debate the need for spending cuts, increased tax revenues, or a combination of both, the tax benefits of many retirement savings vehicles Americans have had access to since the Employee Retirement Income Security Act was introduced in 1974 are in jeopardy.

Retirement savings vehicles are being viewed as tax expenditures and are calculated as such by the Congressional Joint Committee on Taxation and the Treasury Department’s Office of Tax Analysis. Tax expenditures, as defined by the Congressional Budget Act of 1974, are “revenue losses attributable to provisions of the federal tax laws which allow a special exclusion, exemption, or deduction from gross income or which provide a special credit, a preferential rate of tax or a deferral of liability.” Herein lies the misunderstanding among those in Washington charged with identifying additional revenue streams to help stem our ever growing deficit. Contributions to qualified retirement plans are tax deferrals, not tax expenditures, and greatly benefit all Americans, not just the wealthy. As budget scores are constructed using a ten-year window, the dollars we are all deferring to our retirement plans today are scored as lost revenue for the Government. However, we will all certainly pay taxes on our distributions in the future (and likely paying taxes on much higher account balances).

The Department of Treasury calculates that 401(k) plans alone will produce a tax expenditure of $428 billion between 2011 and 2017. Needless to say, these figures are attractive to politicians looking for additional revenue to “fix” our budget issues. Unlike deductions for mortgage interest or charitable contributions, which are permanent deductions, tax incentives for retirement savings are a deferral. A recent study shows failure to reflect this deferred tax revenue overstates the tax expenditure estimate by more than 50%. In addition, any change to retirement saving incentives will surely be detrimental to a nation which has historically maintained low savings rates compared to its international peers.

Unbeknownst to our decision makers in Washington, the 401(k) has quietly become the primary savings vehicle in the United States and most beneficial to the middle class. Over 60 million American workers now participate in employer-based defined contribution retirement plans. In the 30 years since they gained acceptance, 401(k) plans and similar retirement savings plans have accumulated over $5 trillion. Trillions more have been accumulated through these workplace savings arrangements, and then rolled over to IRAs. In addition, an overwhelming majority of participants in 401(k) and similar plans are far from wealthy. In fact, almost 80% of participants in 401(k) and Profit Sharing plans make less than $100,000 annually, with 43% making less than $50,000.

It has become clear that 401(k) plans have become Main Street’s savings plan and have been successful at encouraging workers of all income levels to save successfully for retirement. The primary factor in determining if a worker is saving for retirement is whether or not they have a retirement plan available through their employer. Data prepared by the Employee Benefit Research Institute (EBRI) shows that over 70% of workers earning from $30,000 to $50,000 annually participated in employer-sponsored plans when a plan was available, whereas less than 5% of those without an employer plan contributed to an IRA. The Investment Company Institute (ICI) also found among households that made their first mutual fund purchase in 2005 or later, 74% bought their first fund through an employer-sponsored retirement plan.

Clearly, this has been an important and valued benefit that has come a long way to assist individuals to prepare and save for retirement. It has also become clear that we must continue our effort to ensure these benefits remain fully available to our clients and their participants. To learn more, talk with one of our Financial Advisors.


1. This category includes 403(b) plans, 457 plans, and private employer-sponsored DC plans (including 401(k) plans). 2013 figure is as of 9/30; Source: Investment Company Institute
2. Data are estimated; Source: Investment Company Institute