United States: Someone To Watch Over Me And My 401(K)

Last Updated: November 21 2017
Article by Lori Jones

Reprinted with permission of the Employee Benefits Plan Review – July/August 2017.

There has been a great deal of focus in recent months on efforts to repeal and replace the Affordable Care Act and various investigations into Russian influence on the 2016 presidential election. Notwithstanding the gravity of these matters, there is an additional issue emerging that warrants the attention of employers and employees alike. That is the mounting concern regarding the possible adverse impact of tax reform on private sector retirement savings.

The Save Our Savings Coalition

On April 4, 2017, with relatively little fanfare, a group of advocates and businesses announced the formation of the Save our Savings Coalition, an alliance founded for the express purpose of protecting the retirement savings of Americans from congressional efforts to reform the tax system. Members of the Coalition include the American Benefits Council, Principal, TIAA, T. Rowe Price, Mercer, the American Retirement Association, the Investment Company Institute, among others. In the press release announcing the launch of the Coalition, Jim McCrery, former ranking member of the House Ways and Means Committee stated:

Tax reform is a worthy goal that, if done right, could present policymakers a unique opportunity to preserve and enhance the system that's helped millions of hardworking Americans save for retirement. On the other hand, misguided proposals could unintentionally undermine the incentive for employers to offer retirement plans or for working people to save.

One of the first actions of the Coalition was to send a letter addressed jointly to the chairman and the ranking member of the Economic Policy Subcommittee of the Senate Committee on Banking, Housing and Urban Affairs requesting that the subcommittee "take steps to help preserve, enhance, and expand the system that's helping millions of hardworking Americans save for retirement." In May, the Coalition held briefings on Capitol Hill for congressional staffers to educate them on need to protect the existing retirement savings system.

Tax reform proposals

What has triggered this sudden concern with respect to the private retirement system? The reform proposals included in President Trump's April 25, 2017, tax plan do not explicitly target the existing retirement system. However the plan states in general terms that tax reform is to be paid for via economic growth, reducing deductions, and closing loopholes. Similarly, the House version of tax reform issued on June 24, 2016, under the name, "A Better Way," indicates that tax reform will be revenue-neutral due to the positive revenue effects of economic growth and the repeal of tax increases under the Affordable Care Act.

It is now clear that action with respect to the Affordable Care Act, including the repeal of tax increases, is unlikely in the foreseeable future. In addition, according to U.S. Commerce Department data, the first quarter 2017 U.S. growth rate was the lowest in three years. This eliminates two of the primary offsets for the cost of tax reform. As stated by Michael Hadley, a partner at the lobbying firm of Davis & Harman,

If you're going to make big tax cuts revenue-neutral, you'd have to make some very bold steps. There are lots of options available to use the retirement savings system as a piggy bank, unfortunately.

This "piggy bank" characterization of the U.S. retirement system is well supported by the recent estimate of the Congressional Budget Office that the cost of federal tax incentives for retirement plans will be $1.2 trillion over the next 10 years. [Chapter 4, The Revenue Outlook, "The Budget and Economic Outlook: 2016 to 2026," Congressional Budget Office, p. 105 (January 2016)]

Raising awareness

Since its formation in April, several members of the Save our Savings Coalition have taken steps to raise awareness about the threat that tax reform could pose for the private sector retirement system. In May, the Plan Sponsor Council of America (PSCA) launched a survey of employer plan sponsors, seeking input regarding issues such as the impact of limiting or eliminating pre-tax contributions to 401(k) plans. The PSCA scheduled a meeting of its members in June to present the results of the survey. With respect to the survey, Kenneth Raskin, the Board Chair of the PSCA stated,

"As the voice of America's plan sponsors and retirement savers, it is critical that PSCA educate Washington's policymakers on the potential impact that changes to the tax code could have on qualified retirement plans and on American workers' preparation for retirement."

Another Coalition member, the American Benefits Council, issued on June 6, 2017, a document outlining ten principles for a national retirement savings policy. With respect to the document, the Council's President, Jim Klein, stated,

As lawmakers consider enormously significant changes to workplace retirement plans – perhaps largely motivated to generate revenue for other tax priorities – we urge them to consider how those changes meet the foundational principles articulated here. If we work together, we can move closer to our shared goal of improving financial security in retirement for all Americans.

The Council's Ten Principles

The Council Ten Principles are set forth below with some personal commentary.

  1. Ensure a diversified, balanced and robust retirement system.
    Under this principle, the Council emphasizes the importance of the "three-legged stool" of individual savings, Social Security benefits and employer-sponsored retirement plans in assuring the economic security of retirees and their families. According to the Council employer-sponsored retirement plans must be "strong and sustainable," individual savings must be "preserved for retirement," and we must ensure that the Social Security system remains viable.
  2. Expand coverage by building on the successful voluntary employer system.
    The Council notes that employer plans offer employees tremendous value via features such as lower investment costs and access to investment guidance. The Council suggests that increasing participation among groups that are historically excluded from employer plans, for example, part-time employees and moderate-income workers and employees of small employers, can be achieved through rules that encourage employers to sponsor retirement plans.
  3. Preserve and encourage the growth of employer plan sponsorship by strengthening and expanding tax incentives.
    Currently, qualified retirement plans benefit from the combined tax benefits of immediate employer deductions and delayed taxation of participants with respect to plan contributions/benefits and any earnings thereon. Rather than cut back on these tax incentives, the Council suggests that Congress should expand tax incentives designed to foster retirement savings.
  4. Retain the federal framework for plan design and administration. One of the primary goals of ERISA was the establishment of uniform protections for retirees. The Council reminds policy makers that retirement systems established by states result in inconsistent protections for participants and additional costs for employers.
  5. Offer employers the flexibility to design plans to best serve diverse and evolving employee populations.
    The retirement goals of baby boomers are quite different from millennials. And yet, employers must attempt to allow all employees achieve their retirement objectives. The Council encourages policymakers to be broad-minded in developing permissible methods of retirement savings.
  6. Minimize regulatory burdens on plan sponsors.
    As Abraham Lincoln might have said (had he been an ERISA attorney), given the hundreds of pages of applicable regulations, it is impossible for a qualified retirement plan to be 100 percent compliant with ERISA and the Internal Revenue Code 100 percent of the time. Arguably, such a heavy regulatory burden discourages some employers from providing employee retirement benefits. While the Council acknowledges the need for some regulations, it supports a "least burdensome compliance" standard that measures the importance of policy objectives against regulatory burdens.
  7. Enable participants to save for extended retirement and address the financial risks of longevity and economic volatility.
    The good news is that, on average, we are living longer. The bad news is that the current statutory and regulatory limits on qualified retirement plans do not reflect the longer life expectancies of many Americans. Under the current system, employees are more and more likely to run out of retirement money before they die. The Council encourages policymakers to consider these demographics, as well as the unexpected costs of disability, in establishing incentives for retirement savings.
  8. Expand opportunities for participants to obtain financial advice and education.
    Experts can debate whether the partially implemented Fiduciary Rule improves or restricts a participant's access to financial advice and education with respect to retirement. But few would disagree that participants need more help in planning for retirement. The Council urges policymakers to carefully consider and promote tools and resources that can help participants set and achieve retirement goals.
  9. Encourage the responsible use of technology to fulfill plan obligations. Many employers chafe against the restrictions imposed by the Department of Labor and the Internal Revenue Service on the use of technology, particularly with respect to participant disclosures and retirement plan elections (for example, loan and hardship documentation requirements). The Council suggests that policymakers be reasonable in allowing employers to reduce costs and improve participant services via the use of technology with respect to retirement plans.
  10. Make changes to retirement plans based on sound policy, not on the need for revenue to fund unrelated government policies, nor on incomplete budget estimates.
    This principle could be restated as a variation on James Carville's masterful 1992 campaign strategy: "It's retirement policy, stupid." In more diplomatic language, the Council asks policymakers to refrain from focusing on short-term budget goals at the expense of long-term retirement policy.

So how worried should we all be about our 401(k) accounts? Accordingly to an April 26, 2017, article in InvestmentNews, the idea of mandating some level of Roth contributions in place of pre-tax participants contributions is currently under consideration by some. This could be a game-changer for both employers and employees alike. Stay tuned.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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