If you work for a small business, it's likely that you don't have access to a workplace retirement plan. That's especially true for those on the low end of the wage scale.
On the other hand, if you're lucky enough to be a key employee in a medical or law office that sponsors a defined benefit (traditional pension) plan and defined contribution plan such as a 401(k), you hit the retirement jackpot.
Despite all the tax incentives in place designed to lure small businesses to offer retirement plans to their workers, "private plan participation remains stalled at roughly 50 percent of the private sector workforce," concludes a recent report by the Government Accountability Office, or GAO.
More worrisome, from the GAO's standpoint, is the fact that among those of us who do have access to a workplace plan, only 5 percent are taking full advantage of them. The contribution limits in 2011 for defined contribution plans are $16,500 a year, $22,000 for those 50 and older, not including employer contributions. The combined limit of employee and employer contributions this year is $49,000.
Just as an aside, the maximum amount that can be put into a traditional pension plan this year is $195,000 per person. That type of plan is funded exclusively by the employer.
Uneven distribution of benefits
Perhaps most troubling but not surprising: The 5 percent of the population that maximizes 401(k) contributions tends to skew to the well-to-do. Among those who stash away as much as possible, less than 1 percent -- or 0.6 percent, to be exact -- earn $51,999 or less a year. Nearly three-quarters (73 percent) earn more than $126,000.
The GAO report suggests tweaks be made to the retirement saver's credit to enable more lower- and middle-income workers to save for retirement.
Why is the government concerned about these retirement trends? Because the tax revenue losses amount to serious money: about $105 billion in 2011, plus another $602.2 billion from 2012 to 2016.
Could it be that a government plot to kill the 401(k) plan is brewing in the name of fiscal discipline? Not a chance, but there have been proposals to cut back on contribution limits. The Simpson-Bowles proposal, for example, would reduce the overall limits of defined contribution plans to the lesser of 20 percent of pay or $20,000. Is that so bad?
Implementation of such a policy "would hurt the lowest income quartile's retirement savings, not just the top quartile," says Judy A. Miller, chief of actuarial issues and director of retirement policy at the American Society of Pension Professionals & Actuaries, or ASPPA.
"I would be surprised if legislation totally eliminates IRS Code Section 401(k)," Miller says. "However, if limits are reduced severely or other changes under the guise of 'simplification' make these plans less attractive, fewer employers will sponsor these plans, and retirement savings for low and moderate income workers will suffer."
Brian Graff, executive director and CEO of ASPPA, disputed the facts in the GAO's report in a recent press release. "Based on the IRS' own data, 74 percent of workers participating in defined contribution plans come from households making less than $100,000. Only 5 percent come from households making more than $200,000," he said.
No matter what or how the statistics are presented, it's clear that the 401(k) plan is the best weapon Americans have in their retirement planning arsenal.
What do you think? Should the government reduce the amount we can contribute to our workplace retirement plans?
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