‘Golden Years’ at Risk With 401(k) Tax Breaks on Chopping Block


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In a world where fewer employees can expect to receive lifetime income from a traditional pension plan, retirement security is increasingly hard to come by. A $2,400 cap on pretax contributions to 401(k) plans would likely make things harder.

GOP lawmakers have reportedly toyed with the idea of shrinking the 401(k) contribution limit as a way to pay for other cuts they want to include in a forthcoming tax reform package.

Mere mention of the idea prompted a swift reaction from many quarters, including retirement industry experts who agree that such a move would weaken incentives for workers to save (see related story).

Of course, many people already face strong headwinds when it comes to making sure they’ll have enough money for their “golden years.” A new report by government researchers painted a bleak picture even before lawmakers floated the idea of reducing 401(k) tax breaks.

(A draft of the GOP tax reform proposal unveiled Nov. 2 didn't include a reduction in 401(k) tax breaks; see story.)

Shaky Pillars

“For a growing number of Americans” the current retirement system won’t be able to ensure adequate benefits, according to the report, released Oct. 18 by the Government Accountability Office.

Social Security, a key pillar of the retirement system, is projected to be unable to pay full benefits starting in 2035, the report says.

The average Social Security benefit is about $1,360 a month, or $16,300 a year, and a larger percentage of that benefit will need to go toward paying for health care in retirement. (See related story, Retirement Dread Is Replacing the American Dream.)

That leaves more weight resting on employer-sponsored plans. But the landscape has changed over the years as companies have migrated away from traditional defined benefit pension plans, which provide retirees with monthly annuity payments for as long as they live.

Instead, employers now favor defined contribution plans, which shift retirement saving responsibility over to individuals. And the GAO report says “even with employer contributions, many individuals are not saving enough in their DC plans to provide for an adequate retirement.”

A comparison of figures from 1975 and 2015 reveals the dramatic nature of the transition. The number of DB plans dropped from about 103,000 to 45,600, while the number of DC plans climbed from 207,700 to 648,300. 

Low-income households with access to a DC plan are “least likely to be able to sustain an adequate retirement,” according to the report.

No Employer Plan? States Want to Help

In some cases, workers lack access to employer-sponsored plans of any kind, and that’s where several states would like to step in with programs that give people a convenient way to set aside money for retirement.

Such programs generally call for auto-enrollment of employees, unless they opt out. Employers would play a limited role, serving mainly as a conduit under the programs. They would take the prescribed deductions from employees’ paychecks and forward the funds to the institutions that manage employees’ individual retirement accounts.

Workers are receptive to the auto-IRA concept, according to a survey released by The Pew Charitable Trusts. Only 13 percent said they would opt out of an auto-IRA, the survey found.

Oregon is one of the states developing an auto-IRA program, dubbed OregonSaves. An initial pilot phase had 100 participants who saved more than a combined $30,000 from July 1 to Sept. 30. A second pilot phase is slated for Nov. 15.

However, the program may not survive. For one thing, it faces a legal challenge from the ERISA Industry Committee (see related story). In addition, OregonSaves and other programs like it have lost a regulatory safe harbor that was intended to protect them from preemption under the Employee Retirement Income Security Act (see related story).

Employers will want to keep an eye on these developments to stay abreast of changes affecting the U.S. retirement system. In addition, they may want to consider changes in their retirement benefits, as well as educational efforts aimed at helping workers build up a big enough nest egg for retirement.

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