Government Proposals That Could Change Your Retirement Plan

| November 17, 2011 | 0 Comments

ASPPA News from the Field
2011 Annual Conference

WASHINGTON (October, 23, 2011) The American Society of Pension Professional and Actuaries (ASPPA) held their annual conference in National Harbor, MD October 23-26. The conference is for professionals that administer and consult on retirement plans to learn about emerging issues and trends in their industry.

The emerging issue of government proposals to change retirement plans were discussed in the Washington Update session with three panelists from ASPPA - Brian Graff, Executive Director\CEO, Craig Hoffman, General Counsel and Director of Regulatory Affairs along with Judy Miller, ASPPA’s Director of Retirement Policy.

The concern is that proposals will reduce the amount of contributions for employees to their 401(k) plans in an attempt by the government to increase revenue. The 20/20 proposal by the Deficit Reduction Commission would lower the amount of money that employees and employers can contribute to 401(k) plans. For 2011, the amount that can be contributed for an employee to a 401(k) plan is the lesser of $49,000 or 100% of pay. The 20/20 proposal seeks to limit the amount to the lesser of 20% of pay or $20,000. The limit applies in total to amounts that an employee contributes through salary deferral and amounts the employer contributes on behalf of the employee.

A proposal by the Congressional Budget Office would eliminate catch-up contributions that allow workers age 50 and older to contribute an additional $5,500 to their 401(k) plans. It would also reduce the total employee contributions to $14,850 per year.

The inherent flaw with the proposals by the Deficit Reduction Commission and the Congressional Budget Office is that contributions to retirement plans are not tax free, they are tax deferred. This means the government will get their money; it is just a question of when they want to receive it. If they keep the current limits, larger contributions go into retirement plans, generating larger gains in the long term. The government then receives more tax revenue when employees take distributions from these plans. If limits are lowered under the proposals above, less money goes into the plan, market gains are smaller and future tax revenue upon distribution is less. These proposals would hurt plan participants and only provide a short term relief to the government’s revenue stream.

Other proposals such as the Hamilton Project proposal would give a tax credit to employees instead of allowing them to contribute money pre-tax. The money contributed to the plan would be taxable as ordinary income when it is contributed and then again when it is withdrawn. The advantage of pre-tax employee deferrals to a 401(k) plan is that more money is contributed and has the potential to earn more in the market. Less money going into a plan for the employee along with the double taxation at distribution will erode their ability to properly save for retirement.

The state-run multiple employer defined benefit proposal seeks to allow states to establish a cash balance plan that could be adopted by small private employers to contribute on behalf of their employees. It would require employers to make a fixed contribution where they have flexibility under a 401(k) plan. The assets of public employees and private employees would be invested together which could provide economies of scale and most likely reduce overall expenses in investment management. However, it is unclear how funding shortfalls, such as poor asset return or employers unable to make their contribution, would be addressed. Options include the state making up shortfalls, reducing participant benefits or some kind of guarantee fund financed bythe employers. This proposal is not particularly appealing as states struggle with their own budgeting issues.

According to the National Compensation Survey conducted by the Bureau of Labor Statistics, 73% of full time private-sector workers have access to a workplace retirement plan with 80% participation. The hope is that Washington will work with the private retirement industry to construct proposals that complement and build on the private retirement system to enhance the retirement savings opportunities of Americans.

-J. Wayne Braun, ERPA, QPA, QKA
Manager, Actuarial and Consulting Services
People’s United Bank Retirement Services
ASPPA Member since 2003


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