Retirement Policy Recommendations in Light of Pending Federal Tax Legislation

SUMMARY

The Committee on Employee Benefits and Executive Compensation issued a letter urging Congress and the Administration to prioritize policies that strengthen the private retirement system. The Committee stresses that retirement policy should focus on expanding plan formation, participation, and savings, rather than serving as a source to fund future  tax cuts or Social Security. They emphasize the importance of maintaining current tax incentives for employer-sponsored retirement plans, as these are crucial for encouraging both employers and employees to participate. The Committee highlights the detrimental effects that complexity, frequent tax law changes, and mandatory Roth contributions could have on plan sponsorship and worker savings, especially for small businesses and older employees.

The letter makes several specific recommendations to promote retirement security. These include preserving stable and simple tax rules, exempting SECURE Act guidance from regulatory restrictions, and making Roth contributions voluntary. Additional recommendations urge expanding investment options in 403(b) plans, supporting supplemental retirement savings like HSAs and nonqualified plans, and promoting lifetime income options and Pooled Employer Plans (PEPs) to increase participation, particularly among small businesses. Finally, the Committee suggests a tax credit to incentivize employers to provide financial education for employees, which could improve financial literacy and reduce early withdrawals from retirement accounts. 

REPORT

The Hon. Mike Crapo, Chair
The Hon. Ron Wyden
Committee on Finance
United States Senate
219 Dirksen Senate Office Building
Washington, D.C. 20510

Helen Morrison
Office of Benefits Tax Counsel
Department of the Treasury
1500 Pennsylvania Avenue, NW Room 3044
Washington, D.C. 20220

The Hon. Bill Cassidy, M.D., Chair
The Hon. Bernie Sanders
Committee on Health, Education Labor & Pensions
United States Senate
428 Senate Dirksen Office Building
Washington, DC 20510

Jack Lund
Caitlin Soto
Senior Policy Advisers
Employee Benefits Security Administration
U.S. Department of Labor
200 Constitution Ave NW, Suite S-2524
Washington, DC 20210

The Hon. Jason Smith, Chair
The Hon. Richard Neal
Committee on Ways and Means
U.S. House of Representatives
1139 Longworth HOB
Washington, D.C. 20515

Laura Warshawsky
Deputy Associate Chief Counsel, Office of the Associate Chief Counsel (Employee Benefits, Exempt Organizations and Employment Taxes)
Internal Revenue Service
1111 Constitution Avenue, NW
Washington, DC  20224

The Hon. Tim Walberg, Chair
The Hon. Robert C. Scott
Committee on Education & Workforce
U.S. House of Representatives
2176 Rayburn House Office Building
Washington, DC 20515

Re: Retirement Policy Recommendations in Light of Pending Federal Tax Legislation

Dear Sirs and Madams:

The Committee on Employee Benefits and Executive Compensation of the New York City Bar Association (the “Committee”) is composed of a group of lawyers who represent diverse clients with many different roles in the employee benefits field, including, law firms, plan sponsors, consultants and plan participants. We are writing to express the sentiments of our Committee members[1] about the focus we hope that Congress and the Trump Administration (the “Administration”) will take with respect to employee retirement policy and legislation. The Committee’s overall recommendations are that retirement policy continue to support the goals of increasing plan formation, plan participation, and retirement savings. We believe these goals are sufficiently important and that they should be implemented independently of the desire to fund future tax cuts or the Social Security system.

Why Supporting the Current System is Essential

American workers rely on employer-sponsored retirement plans to provide a secure income in their retirement years. Nevertheless, numerous studies have shown that retirement savings are falling short for many Americans, a large number of whom still lack access to an employer-sponsored 401(k) or other plan.[2] Among the reasons cited by employers for not sponsoring plans is fear of fiduciary liability and the complexity of compliance. Encouraging initiatives to support the private retirement system has consistently been a bipartisan goal and pension reform legislation has enjoyed bipartisan support for many decades. For these reasons, we urge Congress and this Administration to continue this support and their efforts to increase retirement plan coverage and savings.

We believe that to support these goals it is vitally important to preserve the tax benefits associated with plan sponsorship by private employers, including the ability of participants to make pre-tax contributions and the availability of current tax deductions for employer contributions, and to maintain and expand tax credits by incentivizing new plan adoption. Retirement plan benefits should not be viewed as a means to fund tax cuts or the Social Security system. The importance of preserving the current tax benefits of plan participation was illustrated by a recent study by the Investment Company Institute[3] finding that 85% of defined contribution plan participants said that the tax treatment of their retirement plans is a big incentive to contribute. Reducing the benefits of retirement plan sponsorship and participation would have a long-term negative impact that would jeopardize the ability of many working Americans to support themselves in retirement.[4] It would also disincentivize continuation of existing plans by denying a meaningful savings vehicle to the decision-makers who determine whether to continue or terminate existing plans. While we support state retirement savings initiatives, those programs cannot replace the current private sector employer system because they use individual retirement accounts with employee contributions capped at amounts that are substantially lower than tax qualified or 403(b) plan limits, and do not permit employer matching contributions.

For these reasons, we urge Congress and this Administration to continue their support and efforts to increase retirement plan coverage and savings. We particularly urge Congress and the Administration to consider the following recommendations:[5]

1. Keep the Rules Stable

From the point of view of employers as well as employees, tax rules governing tax-qualified retirement plans should encourage employers to establish and maintain plans and encourage employees to participate fully in such plans.

In the past, Congress has funded tax cuts or addressed projected deficits in the Social Security trust fund by changing the tax rules governing tax-qualified retirement plans. Even if particular changes are simple to understand and administer, and even if they avoid perverse incentives, we urge legislators to support continuity and stability of these rules – and the related rules governing IRAs – over time. Frequent changes in the rules as presidential administrations change frustrate plan sponsors by complicating the planning of compensation and benefits packages over the long term and increasing the costs of compliance. Particularly for smaller employers without costly consulting resources or staff on hand, frequent tax changes have a chilling effect, discouraging businesses from establishing and continuing tax-qualified plans.

We understand the challenges of developing legislative compromises, especially in the process of reconciliation between House and Senate bills. However, we urge Congress and the Administration to keep the system stable.

2. Keep the Rules Simple

With the same goals of encouraging private sector employers to establish and maintain retirement plans, and encouraging employees to participate fully, legislative innovations should aim to avoid or reduce complexity in concept and in administrative requirements. For example, SECURE 2.0[6] created a new threshold requiring participants earning over $145,000 to make catch-up contributions on a Roth basis only, but it didn’t take into account that plans didn’t need to track whether employees earned that amount for any other purpose. Congress could have applied the Roth requirement to an existing group of employees, “highly compensated employees”, who are already required to be identified and tracked for other compliance purposes. Instead, Congress invented a new dollar threshold requiring every payroll-deferral system across the country to be modified.

Regulations issued in recent years have sometimes been hundreds of pages long, which further discourages plan compliance. It is not necessary for regulations to cover every conceivable fact pattern. Regulations should be shorter, easy to understand, and establish general principles that can be applied to common facts and circumstances.

We urge Congress and the Administration to keep it user-friendly and simple.

3. Exempt SECURE Act and Other Recent Statutory Guidance from Restrictions on Issuing New Regulations

Recent Executive Orders have restricted the issuance of new regulations. However, plan sponsors and service providers are still awaiting guidance on many important provisions of SECURE 1.0[7] and SECURE 2.0, the most significant pension reform legislation passed in many years. This guidance is necessary for proper operation of plans, and failure to provide safe harbors and basic rules for administering the new provisions will deter new plan adoption and plan continuation.

4. Rothification Should Be Voluntary

Unlike pre-tax contributions to 401(k) and 403(b) plans, Roth contributions are made from after-tax dollars. However, distributions from qualifying Roth accounts made on or after age 59 ½ and after a five-year holding period, including earnings, are nontaxable when distributed. Roth contributions generally benefit younger workers more than workers nearing retirement, because there is more time for nontaxable earnings to grow. In contrast, many older workers who are nearing retirement benefit from the deferral of tax on pre-tax accounts until benefits are distributed, because they are likely to have lower income in retirement and a potentially lower tax rate after retirement. These older workers may never get the tax benefits of Roth contributions if they cannot satisfy the age or five-year holding period requirements. For them, mandatory Rothification of contributions merely accelerates taxation without guaranteeing full tax exemption of the distributions. For these reasons, we believe that participants should always be given the choice whether they wish to make or receive contributions on a Roth basis. For the same reasons, we further urge reconsideration of the requirement scheduled to go into effect in 2026 that participants earning over $145,000 be required to make any catch-up contributions on a Roth basis.

5. Permit 403(b) Plans to Invest in Collective Trusts

We strongly support the passage of the Retirement Fairness for Charities and Educational Institutions Act of 2025 (H.R.1013) that would authorize 403(b) plans to offer collective investment trust products (“CITs”) as plan investments. Currently, 403(b) plans may provide participants with investments only in annuity contracts and mutual funds. Because they are exempt from registration under federal securities law, CITs can be priced very favorably compared to mutual funds. Allowing CITs in 403(b) plans would provide the approximately 10.2 million participants in 403(b)s[8] with an investment option that could materially lower their fees and help them achieve their retirement goals.

CITs have long been used successfully in 401(k) plans, holding 43% of assets in large private sector 401(k) plans (2022) and over 50% of target date fund assets (2024)[9]. As changes in the rules governing 403(b) plans have significantly diminished their differences from 401(k) plans, we believe it is appropriate to afford 403(b) participants the same advantages from these investment products enjoyed by 401(k) participants. Moreover, while CITs may be exempt from securities law registration, they are subject to banking regulations and ERISA, and the bill contains additional requirements for review of CITs by employers in non-ERISA 403(b) plans. Therefore, there will be substantial oversight by fiduciaries and employers of the use of CITs to protect participants.

6. Support Supplemental Retirement Savings

Given the documented gap between retirement savings and retirement needs, we believe that Congress and the Administration should support and maintain programs that supplement retirement savings under tax-qualified and 403(b) plans. Supplemental retirement savings vehicles include: emergency savings accounts for non-highly compensated employees, health savings accounts (“HSAs”), and nonqualified savings and retirement plans. Health care expenses in retirement can eat up savings, and HSA funds can be applied to fund retirement needs to the extent those assets are not used for medical expenses.

It is particularly important to support non-qualified savings and retirement plans. Non-qualified plans are limited in coverage, but they help those who will need supplemental income to maintain their standard of living after retirement. The current tax treatment of non-qualified plans already is less favorable than that of qualified plans and serves to limit their adoption. For example, nonqualified benefits under plans of tax-exempt organizations described in Section 457(f) of the Internal Revenue Code of 1986, as amended (the “Code”) are subject to taxation on vesting, which is earlier than in the case of a qualified plan or 403(b) plan. While other types of unfunded nonqualified plans can defer taxation until benefit distribution (assuming compliance with Code Section 409A), they also defer employer deductions for contributions until the time benefits are distributed. This is in comparison to qualified plans and tax deferred annuities, where employer contributions are immediately deductible. When Section 409A was enacted, it imposed restrictions on non-qualified savings and retirement plans, which operate to curb perceived abuses, and no new restrictions should be imposed.

7. Support Lifetime Income Options in 401(k) Plans

Many defined contribution plans still provide that a lump sum is the only payment option. There is a pressing need for further action to encourage employers to include retirement investments providing lifetime income streams in their defined contribution plans. This helps to ensure that plan participants will not outlive their income. Further, providing annuities and other lifetime income options within employer plans would allow employees access to lower fee institutional products.

SECURE 1.0 created a fiduciary safe harbor for plan sponsors in selecting an insurance company to offer lifetime income products under defined contribution plans. Nevertheless, plan sponsors remain hesitant to add stand-alone lifetime income options due to perceived fiduciary concerns as well as the variety and complexity of annuity products. The U.S. Department of Labor (“DOL”) has signaled its view that lifetime income options may be a permissible part of a “Qualified Default Investment Alternative” (“QDIA”) in the preamble to final regulations. It would facilitate adoption of lifetime income products in defined contribution plans if the DOL were to amend the QDIA regulations to address incorporating specific lifetime income benefits into QDIAs. The addition of lifetime income under the QDIA structure, we believe, would greatly enhance the acceptance of these investments in employer plans. We further suggest that incorporating a limit on the percentage of a participant’s plan account that could be invested in a lifetime income option under a QDIA, perhaps as a safe harbor, would also allow for market returns on the remainder of a participant’s plan account to buffer the effect of the annuity investment.  It would also be helpful for plan sponsors if the DOL issued guidance on what would constitute an adequate explanation of annuity features to participants in the nature of a safe-harbor or model notice.

8. Support Pooled Employer Plans

Only 40% of employees working for a small business participate in an employer-sponsored retirement plan.[10] Only 58% of small businesses even offer access to such plans.[11] According to a Pew research survey, “[t]he most common reasons . . . for not providing a [retirement] plan were cost (37%) and [the employer’s] lack of administrative resources (22%).”[12] SECURE 1.0 offered a remedy for the concerns of small business owners: pooled employer plans (“PEPs”).

PEPs permit two or more employers, regardless of industry, to jointly adopt a retirement plan for the benefit of their combined employees and to “pool” their plan contributions.[13] PEPs are administered by shared third-party pooled plan providers, who act as named fiduciaries and administrators of the plans.[14] The pooled plan provider’s fees are spread across the employers participating in the PEP. By pooling the participants and assets of multiple employers under one plan, a PEP provides economies of scale that may result in lower fees and reduced administrative burden for an organization. Specifically, with their resources combined in PEPs, small employers have bargaining power comparable to that of large employers in negotiating contracts with service providers, can spread costs over more employees and employers, and will have adequate staff to implement lower-cost retirement savings plans. Therefore, the federal government should facilitate the growth of PEPs to increase access to and participation in retirement plans for employees of small businesses.

So far, the only guidance the DOL has issued deals with registration requirements for pooled plan providers. The lack of guidance discourages more widespread PEP adoption. The federal government should issue the guidance contemplated by SECURE 1.0 on their operations and model plan language. The DOL can also reverse an interpretation that causes some PEPs to unnecessarily become subject to ERISA’s independent audit requirement if they have 100 participants in the aggregate. Legislative history indicates that PEPs with fewer than 1,000 participants were not expected to be subject to this audit requirement if no adopting employer had 100 participants. It discourages small employers from adopting PEPs if they are subject to audits that would not otherwise be required.

9. Establish a Plan Sponsor Tax Credit for Enhanced Employee Financial Education

According to Vanguard, in 2024, 4.8% of 401(k) account holders took early hardship withdrawals and 13% of participants had outstanding 401(k) loans; and according to the Federal Reserve, the average retirement savings, including 401(k) accounts, ranges between approximately $30,000 for those under 35 to $426,000 for those ages 65–75. These account balances, depending on other sources of income, are insufficient.

While some plan sponsors provide general education sessions for their employees, these programs are generally short and insufficient for employees’ needs. More targeted financial wellness programs are needed, as financial literacy encompasses investing, debt management, budgeting, and emergency savings. Individuals with low 401(k) plan balances likely have little savings and cannot qualify to work with a financial planner who has a minimum investable assets requirement, probably greater than $100,000. As a result, these employees may not fully understand the value of a 401(k) plan, will likely contribute little to it and will be prone to withdraw money from their accounts. If the government provided a dollar-for-dollar tax credit to employers who offer comprehensive financial literacy courses to their employees, employers and plan sponsors could hire financial planners to provide one-on-one education to employees and plan participants.

Highlighting the importance of saving in a 401(k) plan will lead to better long-term retirement savings and avoid plan leakage (pre-retirement withdrawals) that can result in adverse tax consequences for the employee and a higher 401(k) plan administrative fee for employers.

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The members of the committee who were drafters of these comments would be pleased to discuss any of the issues raised in this letter with you or members of your staff, either individually or as part of a conference call.

Sincerely,

Jonathan M. Reinstein, Chair
Committee on Employee Benefits and Executive Compensation