Increasing Benefits Limits Does Not Encourage New Plans

Data does not suggest a strong connection between increases in contribution limits and the creation of new retirement plans, according to a U.S. Government Accountability Office (GAO) study.

The report, “Private Pensions: Pension Tax Incentives Update,” says despite increases in the statutory contribution limits, new retirement plan growth remained fairly steady between 2009 and 2011. The observed decrease in the number of small defined contribution (DC) plans offset all aggregate plan growth, resulting in the total number of plans falling below levels from 2000, though the number of participants did increase over the same period. Findings also show that factors other than contribution limits, including the recession, may have influenced the amount of new plan formation over the 2009 to 2011 time frame.

The study finds since 2000, the dollar amount of these limits has increased over time, but from 2009 through 2011, the number of new pension plans formed each year in the private sector remained relatively flat, and was below the levels reported previously for 2003 through 2007.

More specifically, from 2009 through 2011, private-sector employers sponsored about 81,000 new pension plans, including 75,000 DC plans and 6,000 defined benefit (DB) plans. DC plans with fewer than 100 participants accounted for about 90% of all new plan growth over this period. In addition, the net change in the number of pension plans over this period was negative, with the number of terminated plans more than offsetting new plan formation by nearly 34,000 plans.

Over the three-year span from 2009 through 2011, private-sector employers terminated about 106,000 DC and 9,000 DB plans. Overall, there were about 52,000 fewer employer-sponsored pension plans in the private sector in 2011 than there were in 2000. The study indicates while tax incentives from increased contribution limits may have spurred new plan formation, other events such as company consolidations and bankruptcies stemming from the recent recession may have discouraged it.

The study also finds high earning and male DC participants accounted for a larger share of those reaching or exceeding contribution limits. An estimated 76% of participants who contributed at or above any of the 2010 contribution limits were in the top 10th percentile of earners, while 47% were in the top 5th percentile. By contrast, the study finds an estimated 2% of participants who contribute at or above any of the 2010 contribution limits had median earning or below.

In addition, an estimated 78% of those contributing at or above the 2010 catch-up contribution limit were men and 22% were women. In 2007, an estimated 74% were men and 26% were women.

Findings from a 2011 version of the GAO study showed 92% of all new plans formed between 2003 and 2007 were DC plans, with 89% being small DC plans. The more-recent study finds that 93% of all new plans formed between 2009 and 2011 were DC plans, with 79% being small DC plans. The recent data also shows about 26% of these new small DC plans were sponsored by four kinds of professional businesses—doctors’ offices, dentists’ offices, lawyers’ offices and non-categorized professional services.

“To encourage private-sector employers to sponsor pension plans and U.S. workers to save for retirement, federal law authorizes a variety of tax incentives for employer-sponsored pension plans and other retirement savings vehicles. These tax incentives are structured to strike a balance between encouraging employers to start and maintain voluntary, tax-qualified pension plans and ensuring that lower-income employees receive an equitable share of the tax-subsidized benefits,” says Charles A. Jeszeck, director of Education, Workforce and Income Security Issues for the GAO.

Jeszeck explains that under current federal law, certain employer contributions to qualified pension plans, contributions made at the election of the employee through salary reduction, and income earned on pension assets are not taxed until distributed. “Yet these tax deferrals come at a cost. The Joint Committee on Taxation has estimated that in fiscal year 2014, the tax expenditures for such deferrals will result in the U.S. Treasury forgoing around $100 billion in income taxes,” he says.

There are some in Congress that have proposed modifying retirement-related tax deferrals to increase revenue for the federal government. Many in the retirement industry have voiced concerns that such legislation proposed to Congress, which would also freeze contributions limits for up to 10 years, would heavily discourage employers from creating retirement plans and employees from participating in such plans (see “Industry Groups Raising Alarms About Tax Reform”).

The GAO report can be downloaded here.