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.
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.
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)]
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 Ten Principles are set forth below with some personal commentary.
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.
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