FAQs on the Growth act

How important are mutual funds to retirement savings?

A. Mutual funds play a pivotal role in private investing for retirement, accounting for about one-fourth of all U.S. retirement assets (see graph at right). About half of retirement savings in 401(k) plans and 43 percent of all assets in Individual Retirement Accounts (IRAs) were invested in mutual funds at the end of 2004.

Mutual funds have become a big part of how individuals begin saving for retirement. For tens of millions of Americans, the mutual fund or funds they own through an employer’s defined contribution plan has been their entry to investing for retirement. For tens of millions more, the mutual funds they own in taxable accounts are the low-cost, diversified, convenient way in which they save for retirement.

What is the Investment Company Institute’s position on the Growth Act?

A. ICI strongly supports the Growth Act because it would allow mutual fund shareholders to keep more of their own money working for them longer by deferring capital gains taxes until they actually sell their investment. Thus, the Growth Act will encourage retirement savers to automatically reinvest, as well as to make additional investments for retirement.

How do investors benefit from deferring the capital gains tax?

A. Postponing the capital gains tax until the fund investor decides to sell his or her shares would keep more money at work for mutual fund owners and encourage additional saving for retirement. It also aligns with the popular understanding that capital gains taxes on an investment should not be due until you sell the investment.

What is the benefit in terms of public policy?

A. Passage of this proposal means greater use of retirement savings vehicles, a tax treatment of long-term retirement savings that investors more readily understand and respect, and – most important, of course – increased readiness for retirement as American families are better able to save the amounts they will need for a longer and more expensive retirement.

What is ICI’s position on Social Security reform?

A. ICI applauds policymakers who are working to strengthen Social Security and to assure its permanent solvency and sustainability. The structural imbalance is growing every day—with the number of beneficiaries and the number of years they can expect to draw benefits going up, and the number of workers per retiree going down.

Our country’s ability to remedy that imbalance is much greater the sooner we address it. The Institute has neither embraced nor rejected any specific Social Security reforms. Instead, we have focused on the private savings needed to supplement Social Security regardless of what action is taken to reform that vitally important public program or when.

As FDR said long ago, Social Security is “…a cornerstone in a structure which is being built but is by no means complete.” ICI favors a range of measures that encourage Americans to save and invest in order to more fully build the retirement nest egg they want and will need.

In simple terms, what problem does this bill address?

A. This bill addresses American workers’ need for greater retirement savings. Almost half of American workers have no employer plan offered at work. Even those who do have access to an employer plan right now need to save in order to supplement that benefit. Yet tax assistance for saving outside employer plans and IRAs is modest at best.

Tens of millions of mutual fund investors are either supplementing an employer retirement plan with IRA contributions and/or taxable fund investments or have no employer plan and are saving on their own for retirement.

In order to build retirement savings, most mutual fund investors opt in advance to automatically reinvest capital gains that would otherwise be distributed to them by the fund. Yet they find themselves taxed on these automatically reinvested amounts each year even though no fund shares were sold and no cash was received.

Those mutual fund savers who automatically reinvest are doing what many policymakers want to see—they are holding for the long term, contributing to national savings, and building up their own retirement nest egg. They should be encouraged to save, and not discouraged through a tax on automatic reinvestments.

Who is helped by the Growth Act?

A. This bill will immediately and directly help the roughly 30 million Americans who are investing in long-term mutual funds outside employer plans and/or IRAs. For millions of American workers, low-cost, diversified, easily accessible mutual funds are the best means of building up a retirement nest egg.

The bill will also help to attract those tens of millions who are not now putting aside retirement savings on their own. That’s important. About half of working Americans are not covered by an employer plan. Clearly, American workers need to supplement Social Security and employer plans. And this bill will help make that more achievable.

In addition, the bill will help current retirees. American workers no longer transition overnight to complete retirement and to monthly pension checks for life. Instead, they continue to work, to save, and to invest. And they continue to need growth in their retirement savings – to offset inflation, to fund the additional years many now spend in retirement, and to help cover increasing costs like retiree medical out-of-pocket expenses not paid by former employers or Medicare.

Why is the Growth Act needed?

A. This bill is needed because it helps working Americans save to create a more secure future for themselves and their families.

Social Security was never envisioned as a total solution to retirement. Pensions and personal savings were always seen as important parts of the equation. As efforts continue toward strengthening Social Security, it is also important to remember that private forms of retirement savings need attention, too.

Traditional pensions have fallen dramatically in number; and in many companies where plans remain, funding obligations can be challenging. Defined contribution plans, such as 401(k) plans, have grown in number as traditional pensions have declined.

But overall, a fundamental fact that has not changed for decades—and appears unlikely to change in the future—is that only about half of Americans working today have access to an employer-sponsored retirement plan with which to supplement Social Security. Tens of millions of workers are rarely, if ever, offered retirement plans. They are faced with the need to save for retirement on their own. And that retirement is growing longer and more expensive.

Clearly, policymakers need to look carefully at ways to encourage and assist individuals and families as they save for retirement in such an uncertain world. The Growth Act would help keep more money at work for a longer period of time and that will help people build retirement security.

Isn’t the government already supporting personal retirement saving through deferrals on 401(k)s and IRAs? Why is this new legislation needed?

A. There’s no doubt that 401(k)s and other defined contribution plans as well as IRAs are vital to retirement security.

But many people will spend a good portion of their working lives without access to an employer’s defined benefit retirement plan. Others will spend some, if not all, of their career without a defined contribution employer plan. Those with access to an employer plan should participate as soon as possible, should contribute all they can, should refrain from withdrawing funds prior to retirement, and should supplement that plan with additional savings. But the fact remains that millions of Americans are not saving enough for retirement—either through employer plans, IRAs or other private savings.

People need to save more for retirement, and we need both appropriate incentives as well as the removal of obstacles. The Growth Act provides important added support for people as they prepare for retirement.

What’s the cost? What’s the impact on federal revenues?

A. Since this proposal is designed to let people keep more money at work for a longer period of time, there is a short-term impact on government revenues. Any retirement savings enhancement will have that effect. Of course, as people are allowed to keep their money and let their savings grow, the taxable base will grow, enabling government to recoup revenues in later years.

As for the revenue impact, it will vary year to year based on the capital gains generated and distributed by mutual funds. For example, mutual funds distributed approximately $22 billion in capital gains to taxable household accounts in 2004, which were then typically taxed at the 15 percent rate, while $6 billion in capital gains were similarly distributed in 2003.

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