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Extending Tax Breaks Among Mutual Fund Industry's Goals

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The mutual fund industry has established a broad federal legislative agenda for this year, with key priorities being extending tax breaks and winning support for a provision that would make it easier for investment providers to offer investment advice to owners of 401(k) plans.

Extending current tax incentives and providing new ones for mutual fund investors to put away more for their retirement years are important legislative goals, says Dan Crowley, vice president of legislative affairs of the Investment Company Institute, the trade group in Washington that represents mutual fund industry interests on federal legislative and regulatory issues.

One of the most difficult tasks on the industry’s agenda at the moment is sustaining the House language in pension reform legislation that would encourage greater worker participation in employer-sponsored retirement plans.

A conference committee has been working for several weeks to resolve differences between the House and Senate versions of the bill, with the investment advice provision a critical issue for the mutual fund and insurance industries. But it is also a divisive one, with strong support among House negotiators but deep concerns voiced by such powerful Senate negotiators as Sen. Charles Grassley, R-Iowa.

Other provisions in the pension benefit bill supported by the mutual fund industry are less controversial and have bipartisan backing, although some of them carry huge price tags in terms of the impact on federal revenues.

One would make permanent the retirement, education and other savings incentives enacted in the 2001 tax package. These provisions increased IRA and 401(k) savings limits, created 529 plan options, authorized “catch up contributions” from older savers and more. They now are scheduled to expire in 2010.

If they do, IRA contributions will drop back to $2,000. Allowable contributions are currently $4,000 for those under 50 and $4,500 for those who are age 50 or older. That amount is scheduled to increase to a respective $5,000 and $6,000 by 2008.

For a person age 50 or older, the limit on 401(k) contributions could drop from about $22,000 in 2010 back to $10,500 thereafter.

Another provision would encourage greater participation in employer retirement plans by changing the current opt-in system to an opt-out one. Crowley says ICI research indicates 20% of those eligible to participate in 401(k) plans fail to do so.

“ICI research has shown that making participation automatic unless workers opt out will significantly increase participation, particularly among lower-income workers,” he says. “Greater participation translates to potentially greater savings, which can improve the retirement preparedness of these Americans.”

Negotiators will resume work on the bill when Congress returns from its recess April 24, with some predicting that work on the bill won’t be completed until perhaps Memorial Day.

Another mutual fund industry priority where success is problematical is legislation making permanent the reduced tax rates on capital gains and dividends enacted in the 2003 tax cut bill. These provisions now are scheduled to expire in 2008.

Last year, the House passed legislation extending the 15% tax rate for two years, but the Senate version of the bill omitted this provision. House and Senate conferees currently working to merge the bills are finding the 15% tax provision “arguably the most controversial aspect of the entire bill,” according to a recent report by Washington Analysis, a securities advisory firm.

Crowley says the mutual fund industry supports the House version of the bill because it extends the tax cut provisions by two years and is silent on indexing the alternative minimum tax (AMT), a point that will be addressed without the need to be included in the bill. The Senate bill calls for extending the tax cut and the AMT both for one year.

“We support the House provision because the AMT indexing extension is very popular and has bipartisan support,” Crowley says. “Therefore, we believe it be moved through the Congress on its own, separate from the tax reconciliation bill.”

Regarding the investment advice provision in the pension reform bill, Crowley says concerns by detractors to accepting the House language on investment are misplaced.

The provision in the House bill “makes it easier for 401(k) investors to turn to the professionals most familiar with their 401(k) plan investment options for advice,” Crowley says. “It is abundantly clear that investors need and are seeking more advice in these plans, yet the investment providers–the fund companies–are prohibited from recommending specific options due to concerns about potential conflicts of interest.”

While it will reduce certain conflict of interest provisions contained in current law, it will also impose a higher standard of care on those providing investment services to owners of 401(k) plans administered by a financial services provider. “The reality is that it would strengthen the protection for investors by making the advisor a fiduciary, a higher standard of care under which the advisor would be held liable under ERISA for providing inappropriate advice.

“The real question is what is in the best interest of the investor,” Crowley says. “Our research shows that the 401(k) owner wants that advice.” Moreover, he adds, “to the extent they get that advice, the more they will invest.”

One piece of legislation that has been introduced but will likely take several years to get through Congress proposes to defer taxation of automatically reinvested capital gains. “This is a multi-year project,” Crowley says. Called the GROWTH Act (Generate Retirement Ownership Through Long Term Holding), or H.R. 2121 in the House, the bill has 68 co-sponsors from both sides of the aisle. A similar bill in the Senate has six co-sponsors, Crowley says.

In comments at an industry meeting in Boston earlier this year, Crowley said, “In my view, mutual funds are simply the most effective way for most Americans to receive low cost portfolio diversification and professional portfolio management.”

In fact, he added, “mutual funds have democratized investing in the United States and have helped create a culture of investing here that is unparalleled in the rest of the world.

“We as an industry therefore have a responsibility to ensure the safety and integrity of our products, and to be ever mindful of our fiduciary role as the custodians of these assets,” he said.

Wish List

–To make it easier for investment providers to offer investment advice to 401(k) plan owners.

–To make permanent the retirement, education and other savings incentives enacted in 2001 and due to expire in 2010.

–To encourage greater participation in employer retirement plans by changing the current opt-in system to an opt-out one.

–To make permanent the reduced tax rates on capital gains and dividends enacted in 2003, which are due to expire in 2008.

–To defer taxation of automatically reinvested capital gains.