Lack of tax incentives would derail 401(k) market: Report

A reduction in tax incentives for 401(k) plans would have a negative effect on retirement security because it would discourage savings and reduce the number of employers offering plans, according to a new report by The Principal.

The “2011 Principal Financial Group Retirement Readiness Survey” questioned 1,305 decision makers at small and medium-sized employers across the United States earlier this year. The survey found that 92 percent of employers cite tax incentives as one of the main reasons they offer 401(k) plans, while 65 percent say they would reconsider offering a plan if tax incentives were removed.

More than one-third of employers said they don’t currently offer a plan but the lack of tax incentives would decrease their desire to begin offering one.

[See also: Experts: Tax reforms won't improve retirement security]

“Employers offer retirement plans voluntarily, so it is critically important to understand how proposed changes to the system would impact their decisions,” said Greg Burrows, senior vice president, retirement & investor services at The Principal. “It is especially vital to listen to smaller employers because they are the economic backbone of the nation. What we are hearing loud and clear in this survey is that employers value the current voluntary system and they want Congress to preserve retirement savings tax incentives.”

More than half of those surveyed said they believed tax deferral limits should be raised, not lowered.

“With recent economic volatility and burgeoning baby boomer retirements, the last thing we need to do is remove an incentive to save that is working,” said Burrows. “Instead, we need to encourage more employers to offer retirement plans and enable Americans to save effectively for retirement so they can achieve their financial dreams. That means doing everything we can to encourage workers to save early, save often and save enough.”

Two out of three employers who offer defined contribution plans believe the 401(k) system is effective in helping workers achieve adequate retirement savings. Most believe employees need to be saving on average 12 to 16 percent, including their employer match, over the course of their career.

The report found that 66 percent of employers who offer plans would be willing to improve education to promote double-digit savings levels. Twenty-two percent would be more likely to add auto enrollment. Forty-four percent would consider a 6 or 8 percent default deferral rate for workers who are auto enrolled in the plan. Thirty-two percent of employers who use auto enrollment would be willing to combine a 6 percent deferral rate with a 1 percent auto increase up to 15 percent if shown research that participants wouldn’t opt out.

The Principal Financial Group is a global investment manager that offers retirement services, insurance solutions and asset management.

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