The Near Future in Retirement Planning

Besides Department of Labor (DOL) fee-disclosure rules requiring mutual fund companies and retirement plan providers to disclose the amount they are charging and to whom, along with Congressional hearings on the fee-disclosure issue, retirement industry observers say the new PAYGO rule that was approved by the House in 2006 will also affect the retirement planning landscape in 2007.

Dallas Salisbury, president of the Employee Benefit Research Institute (EBRI) in Washington, says PAYGO, or the pay-as-you-go rule, will determine, in many respects, what Congress can get done this year. New proposals by Congress must either be “budget neutral” or offset with savings derived from existing funds. Under PAYGO, if Congress decides to cut taxes, Salisbury says, “it has to either cut spending dollar for dollar or raise someone else’s taxes dollar for dollar, but it cannot do anything that increases net spending and cannot pay for things with borrowing.” This creates a problem for tax preferences for the investment field inclusive of such issues as the 15% rate on capital gains, the 15% rate on dividends, and all of the tax incentives for retirement plans–defined contribution, defined benefit, and IRAs–he explains, “because there are a bunch of things that the Democratic Congress and many on the Republican side want to do that will cost a lot of money.”

For instance, Senators Max Baucus (D-Montana) chairman, and Chuck Grassley (R-Iowa), ranking member on the Finance Committee, have said they intend to fully repeal the Alternative Minimum Tax (AMT). But to do so, they have to find a way to pay for the $1.1 trillion in revenue the government would lose if the AMT was abolished. Possibilities include raising taxes for those earning between $300,000 and $500,000 annually, corporate tax rate increases, and changing the taxation of executive compensation.