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Introduction
The National Society of Professional Engineers (NSPE) has supported the formulation of a sound national retirement income system for several decades. In addition, several of NSPE's affiliated state societies and other national engineering societies are strong proponents of pension reform, particularly in the areas of portability and the consideration of a direct fiduciary role for the engineering societies in administering a retirement plan for engineers and other technical professionals. As Congress and the Administration continue to develop policies affecting retirement income, we must play a role in ensuring that their proposals respond to the retirement needs of the engineering profession.
Background and Objectives
Many in our nation's workforce have access to a variety of retirement savings options. These options include employer-sponsored qualified retirement and profit-sharing plans and personal savings mechanisms (1). Qualified retirement plans are classified into two basic categories: defined benefit plans and defined contribution plans.
Defined Benefit Plans—An employer choosing to offer a qualified retirement plan may elect to fund the entire benefit from operating profits, allow a combination of employer and employee contributions, or sponsor an "employee only" plan and not make an employer contribution. Under defined benefit plans, the amount of income benefit an employee will receive in retirement is determined by a formula that factors in salary level and length of employment. Such a formula allows an employee to predict the amount of money that will be available upon retirement.
Defined Contribution Plans—Under defined contribution plans, an employee's retirement benefit is based on the amount that has been contributed to an individual account for that employee and the income or losses of the accounts of other plan participants that may be allocated to the employee's individual account. Unlike a defined benefit plan, whereby the employee benefit upon retirement is fixed by formula, the benefit accrued in a defined contribution plan fluctuates based on the amount invested and the success of the investment. There are numerous types of defined contribution plans, including 401(k) plans, thrift plans, profit sharing plans, Keogh plans, and simplified employee pensions (SEPs). Both defined benefit plans and defined contribution plans are governed by the Employee Retirement Income Security Act of 1974 (ERISA).
An employee must meet certain eligibility requirements, including age and years of service, in order to participate in a qualified retirement plan. The plans commonly include a time frame by which participants become "vested", i.e. acquire ownership of their employer's contribution to the accrued benefit. Employers may design a vesting schedule of their choice, as long as it is not more restrictive than one of two vesting standards set by law, up to a five year schedule with full vesting achieved only after prescribed years of service and no partial vesting before then (known as "cliff" vesting) or up to a seven-year schedule whereby full vesting is gradually achieved over a prescribed period with partial vesting acquired after at most three years of service. Vesting affects an employee's right to accrued benefits contributed by the employer. Employee contributions are nonforfeitable at all times.
The federal government also offers tax incentives aimed at encouraging individuals to voluntarily set aside a portion of their income for retirement through tax shelters such as Individual Retirement Accounts or Annuities (IRAs) and Roth IRAs. Individual Retirement Annuities offer tax deferral on earnings only, whereas Individual Retirement Accounts also allow a tax deduction for contributions to the account.
The Problem Identified
Only 62% of the nation's workforce have access to employer pension plans (2). And over 51 million people do not have pensions. While the federal social security system may provide retirement income for the maintenance of some basic necessities, social security benefits alone are insufficient to ensure an adequate retirement income. Shifts in employment opportunities for some of our nation's engineers from large-scale manufacturing to smaller high technology and service firms are leaving them without pension opportunities because the smaller businesses to which they are relocating are unable to afford the high costs and uncertainties of qualified retirement plans and may choose not to provide any pension benefits whatsoever.
Mobility of the American Workforce—Since the 1980s, a dramatic increase in the mobility of the American workforce has occurred to the point that the established retirement plan options in the United States are quickly becoming obsolete. Technical professionals have been particularly affected by these shortcomings in retirement income policy because of the highly mobile nature of their profession. Engineers remain in one job on an average of only 4 years because workforce shifts are causing them to change employment. If the employer chooses either the five or seven year vesting standards prescribed by law, this length of service will fall short of the term of service required for full vesting, and as a result, many engineers are unable to transfer all of their accrued benefit.
Restrictions and Over Regulation—Declines in qualified retirement pension arrangements can also be attributed in part to changes in accounting standards requiring corporations to acknowledge underfunded liabilities, government over regulation, and the high administrative costs to employers for maintaining such a plan. The cost of required audits is in itself driving many small firms away from offering retirement plans. And, complex nondiscrimination rules relating to 401(k) plans, particularly the participation coverage and "less highly compensated" and "highly compensated" rules, limit private sector professional workers' ability to fully participate in such plans. The restrictions on what percentage different "classes" of employees can defer is extremely burdensome and uniformly unfair, when compared to the investment choices available to public sector employees. Government workers, teachers, and employees of certain nonprofit organizations are allowed to contribute up to 15 percent, or $10,500 per year to a 401(k) plan, whichever is less, regardless of what their fellow workers contribute. Unlike the private sector, they may also choose to direct their own investment choices.
Poor Management—Our nation's retirement income system is also being threatened by the poor management of retirement funds, as well as corporate failures, bankruptcies, and hostile takeovers that have left employees without the coverage they had been led to expect. Even the participants in some previously sound public retirement plans are at risk of losing their benefits because state and local governments may be unable to pay them in the future.
Not only has the federal government, in some cases, failed to respond to the demands of a changing workforce vis-à-vis retirement income, it has also prevented some individuals from participating in voluntary arrangements intended to promote retirement savings. Actions by Congress and the Administration in the Tax Reform Act of 1986 that limited most individuals from making tax-deductible contributions to IRAs have curtailed access to this incentive by many technical professionals. The tax incentives offered through IRAs may also be restricted if an individual or their spouse is an "active participant" in any other qualified retirement program.
While IRAs present an opportunity for individuals to make additional retirement savings outside of the employer-provided pension system, IRAs are not protected by ERISA and as such are not immune from attachment as personal assets in bankruptcy or professional liability judgments. This vulnerability limits the role that IRAs play in replacing other retirement income mechanisms.
Only recently has Congress attempted to reform retirement income policy. In 1996 federal requirements were simplified to improve the small business employer ability to establish retirement savings programs for their employees; non-discrimination rules that tended to limit workers in higher income brackets from establishing adequate retirement savings programs for themselves and their families was repealed; and the IRA contribution limit for married couples was increased by raising the allowed contribution of an unemployed spouse from $250 to $2,000.
Also, the Taxpayer Relief Act of 1997 introduced many IRA changes that may benefit a wide range of investors. Over time, the law will make it easier for more people to deduct their IRA contributions, and it also created new options for investors saving for their retirement. One of those options is the Roth IRA. The Roth IRA is a new investment vehicle that allows investors to set aside up to $2,000 (or 100% of your earned income, whichever is less) in retirement savings each year. The contributions made to a Roth IRA are not tax-deductible, but the earnings can be tax-free if certain guidelines are followed.
Advocacy of NSPE
Qualified retirement plans and other retirement income arrangements must be designed to reflect changing employment conditions if we are to ensure an acceptable standard of living for our nation's retirees. A national retirement income system must include a variety of options for providing retirement savings opportunities for those already in the workforce and our future workforce.
Employers should assume the responsibility for sponsoring retirement plans for their employees. Employer-sponsored retirement plans that cover engineers should at a minimum be consistent with the following guidelines set forth in the Guidelines to Professional Employment for Engineers and Scientists:
Employers should provide a pension plan for employees who meet minimum participation standards. Based on a full career, the minimum employer-sponsored pension benefit at retirement should be no less than 50 percent of the average best five years' salary. Employer-sponsored pension plans should provide for early participation and vesting, full portability, and survivor benefits. Consideration should be given to periodic increases in pension benefits relating to increases in the cost of living. Pension benefits should not be integrated with Social Security. The fund that supports the plan should not be terminated until all obligations to vested employees and retirees have been met. Tax-sheltered savings plans should be available to provide incentives for individual investment for retirement.(3)
Engineers must also assume personal responsibility for planning for their retirement immediately upon entering the workforce and should carefully consider a prospective employer's retirement plan as part of their overall evaluation of the employer. Decisions as to the nature of the retirement plan an employer will offer should be left to the discretion of the employer. However, employers should consult with their employees in order to design an appropriate retirement income program.
We oppose a national retirement income system that imposes prescriptive federal government mandates on employers. However, as it is empowered with oversight of the nation's private pension system, the federal government can and should play a role in establishing a policy that promotes pension accessibility for employees and promotes the portability needs of our increasingly mobile workforce. The federal government should meet these objectives by enacting new laws and regulations that accomplish the following:
Portability of Benefits—The federal government should modify the law to mandate the portability of employer contributed benefits from defined benefit plans. (Portability, i.e., the ability to transfer benefits from a qualified retirement plan, is already available under defined contribution arrangements.) When transferring benefits from a defined benefit plan, the transfer value of the benefit should be calculated at the prevailing market rate. In order to eliminate the administrative burden for employers, individuals, when changing employers, should transfer their accrued benefit to a tax-deferred account such as an IRA or to another qualified retirement plan.
Decreased Vesting Periods—Due to the increasingly transient nature of employment opportunities in the workforce, particularly for technical professionals, the current five year "cliff" and seven year "graduated requirement for vesting is too high and should be reduced to a three year "cliff" standard and five year "graduated" standard.
Incentives for Saving Pre-Retirement Lump Sum Distributions—Employees who withdraw from a retirement plan before reaching retirement age should be encouraged to transfer their accrued benefit into a new retirement plan rather than spend the lump sum distribution. The government should promote this transfer by increasing the tax penalty on the withdrawn pension benefits that are not rolled over into another retirement plan.
Promotion of Voluntary Savings—We support legislation to restore the ability of all wage earners to participate in government-sponsored voluntary savings plans such as IRAs or early augmented contributions to their defined contribution plans. Early withdrawals should be allowed without penalty for the purposes of meeting expenses associated education, long-term unemployment, or extraordinary medical expenses. Current law should be modified to allow IRA deductible contributions on an equitable basis for all individuals who have earned income, regardless of their own or spouses' participation in other plans. The tax deferral of earnings under annuities should be continued.
Because IRA assets have potential bankruptcy or professional liability risks associated with them that retirement plans do not, a national retirement income system should not depend entirely on IRAs or other voluntary savings mechanisms as the primary provider of retirement income. Instead, IRAs should be considered a supplemental component to other retirement income plans.
Expanded Pension Coverage—We support legislation that will increase private employer participation in retirement plans, particularly small firms, and provide an equitable structure similar to that offered to the public employee. Among the proposals we endorse are to increase the size of firms that are eligible to establish SEPs and to relieve small enterprises from the burdens of complicated non-discrimination tests, while still maintaining assurances that equity among beneficiaries at differing compensation levels is preserved. We also support proposals to require employers that do not sponsor pension plans to provide a voluntary salary reduction arrangement for their employees. Such a requirement places less burden on employers than does a mandated employer contribution, yet it still provides a mechanism for employees to save for their retirement. Employees should place these contributions into a retirement income plan that is protected by ERISA in order to protect such funds from bankruptcy or professional liability judgments.
Simplified Government Regulation of Retirement Plans—Regulatory requirements imposed on employer-sponsored retirement plans serve as a disincentive for employers to establish such plans and should be made less complicated. The government should make every effort to simplify these complex administrative requirements as an incentive for employers to provide greater pension coverage.
We note the interest of some engineers in creating a multiemployer retirement plan for engineers and other technical professionals. We believe that there is a lack of consensus within the profession as to whether such a system is needed or workable. In the absence of such consensus, we seek to address the retirement savings needs of professional engineers through legislative and regulatory changes such as those recommended above.
Impact on Related Issues
We recognize that many of the policy recommendations advocated cannot be accomplished without an impact on the federal treasury. However, we must convince Congress and other interested parties that the primary purpose of a national retirement income system is to improve retirement savings options for American workers. Retirement policy should not be confused with tax policy.
Furthermore, we recognize that our views may differ at points from those of other organizations representing engineering professionals. We pledge to work jointly with those societies on areas of mutual agreement in an effort to enhance retirement savings opportunities for our nation's engineer workforce.
Citations
1. Details and explanations of qualified retirement plans provided in this section may be verified in The Pension Answer Book, Seventh Edition, Stephen J. Krass, Esq., Panel Publishers, New York, 1992.
2. "Improving Small Business Pensions", CQ Outlook, November 1998, p. 11.
3. Guidelines to Professional Employment for Engineers and Scientists (NSPE Publication # 0013), Third Edition, October 31, 1989.
