Money Market Funds
Operations and Technology
Washington: Put Your (Retirement) Money Where Your Mouth Is
By Mike McNamee
March 4, 2014
When President Obama announced a new effort to expand access to retirement savings opportunities, ICI was among the first to applaud. The Administration’s “myRA” looks to provide a new option for Americans who want to put money aside for retirement, but who might not have access to a retirement plan through their workplace. These accounts would complement the wide array of investment options already available to these workers.
But creating new opportunities will do little good if Washington limits the very incentives that have created the vibrant retirement savings system we have today. In his newly proposed budget for fiscal 2015, President Obama again is proposing to cap the incentives for retirement savings that have been central to the success of employer-provided retirement plans. ICI research shows that Americans have embraced the opportunity to save for retirement based on the current system, which is designed to provide savings opportunities to all. Yes, Washington needs to try to solve federal debt issues and simplify the tax code—but not at the expense of the retirement security of millions of hard-working Americans.
Misunderstanding Pension Taxation Leads to Misguided Proposals
A basic misunderstanding about how tax incentives for 401(k)s and similar retirement plans work has led to many a misguided and harmful policy proposal. The President’s FY2015 budget contains two such proposals: a limit on the up-front tax benefits for many 401(k) and individual retirement account (IRA) savers, and a cap on the amount Americans can accumulate through the combination of defined benefit (DB) plans, defined contribution (DC) plans, and IRAs. (Just to make things worse, that cap happens to be a moving target from year to year—but more on that later.)
Regardless of income or method of deferral (i.e., DB plan, DC plan, or IRA), all workers receive the same tax treatment: they pay no tax on compensation set aside for retirement until they withdraw the money. Because deferral is not a deduction or an exclusion, everyone pays tax when the funds are distributed. There are no special tax breaks to fix, no loopholes to close. This tax treatment benefits Americans across the income-distribution spectrum and encourages employers to offer—and workers to participate in—retirement plans.
The 28 Percent Cap Would Affect All Income Levels
The first proposal in Obama’s budget would limit the value of tax savings on an individual’s retirement contributions to 28 percent. Limiting tax deferrals for the highest three income brackets (33, 35, and 39.6 percent) would substantially change the tax treatment of retirement contributions and undermine retirement security by reducing incentives for businesses to provide retirement plans. As this post explains, “limiting the up-front benefit of tax-deferred contributions to retirement accounts reduces the benefits of tax deferral, but does so arbitrarily...substantially reducing the tax benefits for those closest to retirement.”
The potential spillover effects could be enormous. If some employees no longer assign as much value to the opportunity to save in employer-sponsored plans, some employers likely will find that the benefits their employees receive no longer justify the expense of offering a plan. Those employers may choose to eliminate their plans, using the savings to increase cash compensation. It is difficult to predict the size of the effect, but if the 28 percent cap or other similar proposals were applied to tax-deferred retirement contributions, this change would undoubtedly reduce the number of employers that voluntarily sponsor a retirement plan.
Impact of a Pension Savings Limit
The Administration’s budget also proposes to cap the total amount a worker could accumulate in the combination of DB plans, DC plans, and IRAs—a cap that could prevent workers from reaching their full retirement savings goals.
Under this proposal, fluctuating interest rates or market returns could temporarily push an individual’s total accumulations over the limit in a given year—forcing the saver to stop saving for some time and restart later. This approach is overly complicated and extremely difficult for businesses and families to track. It would create a “stop and go” system that penalizes workers who take responsibility over the long term to save for retirement.
Americans Support the Current System
Washington should not try to fix a system that isn’t broken. Research shows time and again that the U.S. retirement system is strong and is working for millions of Americans, who overwhelmingly support the incentives that help them to achieve their savings goals.
Of course, we can and should do more to build on the successes of the current system. But that starts with keeping what works—and preserving the benefits of tax deferral for all savers working to build a secure retirement.
Visit our Retirement Resource Center to find out more about ICI research and other useful information about America’s retirement system.
Mike McNamee is Chief Public Communications Officer at ICI.
A Growing Urgency: FATCA Agreements in the Asia-Pacific Region
By Keith Lawson
February 21, 2014
Questions are swirling as the 1 July 2014 effective date for the US Foreign Account Tax Compliance Act (FATCA) draws closer.
Money Market Funds and Liquidity Ratios: Why So High and Stable?
By Chris Plantier
February 19, 2014
Second in a series of posts about ICI’s new data release, a monthly compilation and summary of portfolio data from taxable money market funds. To find out more, read the first post about the new data summary or this list of answers to frequently asked questions.
The SEC’s 2010 money market fund reforms require taxable funds to hold at least 30 percent of their assets in securities that are deemed to be liquid within five business days (known as weekly liquidity) and at least 10 percent of their assets in securities that are deemed to be liquid in one business day (known as daily liquidity). In practice, money market funds—especially government money market funds—hold liquidity well above these minimum standards, and these ratios change very little in any given month.
Creating a Globally Workable Compliance Framework for Financial Account Tax Information
By Keith Lawson
February 13, 2014
By developing a global standard for collecting customer information from financial institutions and exchanging that information between governmental taxing authorities worldwide, the Organisation for Economic Co-operation and Development (OECD) has taken an important step to enhance tax compliance. This common reporting standard (CRS) for the automatic exchange of information (AEOI), which was announced by the OECD on 13 February 2014, will be presented to the G20 at their 22–23 February 2014 meeting in Sydney.
Updated FICCA Framework Makes Auditing Omnibus Accounts Easier, More Efficient
By Kathy Joaquin
January 27, 2014
Many financial intermediaries—such as broker-dealers, financial advisers, and retirement plan recordkeepers—provide services to fund shareholders and maintain customer account information on their own recordkeeping systems. Fund sponsors, in turn, want to ensure that intermediaries are meeting their obligations in servicing fund shareholders, and so, have been seeking oversight tools that allow them to do this efficiently and effectively. ICI recently took steps to improve one of the critical oversight tools available to the industry, through a major update of the Financial Intermediary Controls and Compliance Assessment (FICCA) engagement framework.
ICI’s New Data Release: Further Enhancing the Transparency of Money Market Funds
By Chris Plantier
January 21, 2014
The 2010 reforms to money market mutual funds greatly enhanced the transparency of these funds, giving regulators, analysts, and investors greater insight into important elements of funds’ holdings and operations.
The reforms required funds to disclose their entire portfolio holdings to the public on their company websites five business days after the end of each month. Money market funds also are required to file a more detailed disclosure—SEC Form N-MFP—with the Securities and Exchange Commission directly. The SEC releases this more detailed data to the public 60 days after it’s filed. The SEC does not, however, summarize the data, leaving the public with no non-commercial access to a broad look at holdings across the industry.
Column Makes the Same Mistakes as OFR
By Paul Schott Stevens
January 20, 2014
In recent months, both the U.S. Treasury Department's Office of Financial Research (OFR) and international regulators such as the Financial Stability Board (FSB) have examined whether asset managers pose risks to financial stability. One report is deeply flawed; the other offers a more informed view. Unfortunately, Gretchen Morgenson’s New York Times column (“Bailout Risk, Far Beyond the Banks,” January 12) veers toward the flawed report.