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Time Bombs Lurk in Retirement Overhaul: Lawmakers, Experts

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Retirement planning experts and members of the House Ways and Means Committee agreed Tuesday that fundamentally changing the current retirement planning system in efforts to reform the tax code could result in unintended consequences.

“As the Committee continues its work toward comprehensive tax reform, it is important to keep in mind that these savings vehicles affect average people who depend on these resources for their retirement,” Rep. Dave Camp, R-Mich., chairman of the House Ways and Means Committee, said in his opening remarks. “We must ensure that we do not inadvertently take steps that result in unintended consequences that could threaten the retirement security of ordinary families.”

Camp said that as the committee continues to explore tax reform, three important principles must be kept in mind when evaluating tax-favored retirement vehicles: (1) simplification; (2) increased participation, particularly by low- and middle-income taxpayers; and (3) whether the tax benefits are effective and properly targeted.

Indeed, Randolf Hardock, managing partner at Davis & Harman LLP, who was testifying on behalf of the American Benefits Council, told lawmakers that while individuals have heightened retirement income concerns resulting from the recent economic downturn, “those concerns only serve to reemphasize the vital role workplace-based retirement plans play in ensuring personal financial security and in generating savings to fuel the type of capital investment the economy needs to generate long-term growth.”

Some have suggested fundamental changes to the tax treatment of 401(k)s and other defined contribution plans, Hardock said, “but such proposals are deeply flawed and could be fraught with unintended consequences. Proposals that purport to increase short-term federal tax receipts by redirecting, eliminating, or eroding the existing retirement savings incentives would realize those additional revenues largely because individuals would be saving less for retirement.

Any major restructuring of the current system, Hardock continued, “that reduces or tries to reallocate existing retirement tax incentives is a gamble we cannot afford to take when dealing with the retirement security of working and retired Americans.”

Judy Miller, director of retirement policy for the American Society of Pension Professionals and Actuaries (ASPPA), told lawmakers that data show “the current tax incentives have been very successful at encouraging workplace retirement plans.” She cited Bureau of Labor Statistics data that shows 78% of full-time workers have access to a workplace retirement plan, with 84% of those workers participating. “Almost 80% coverage is a success story,” Miller said, “but more needs to be done. The committee should build on the successes of the system, and be mindful that Americans save for retirement at work.”

Miller also cited ASPPA’s support for an auto-IRA proposal by Rep. Richard Neal, D-Mass., as an example of how to expand workplace savings by building on the current system.

Jack Vanderhei, director of research for the Employee Benefits Research Institute (EBRI), told lawmakers that “from both empirical analysis and simulation results based on tens of millions of individual participant observations, the traditional type of 401(k) plan under the current set of tax incentives has the potential to generate a sum that, combined with Social Security benefits, would replace a sizeable portion of the employee’s preretirement income for those fortunate enough to have continuous coverage during their working careers.”

Given that the financial fate of future generations of retirees appears to be so strongly tied to whether they are eligible to participate in employersponsored retirement plans, Vanderhei said, “the logic of modifying (either completely or marginally) the incentive structure of employees and/or employers for defined contribution plans at this time needs to be thoroughly examined.”

EBRI studies, he said, have documented that DC plans—and the IRA rollovers they produce—“are the component of retirement security that appears to be generating the most nonSocial Security retirement wealth for Baby Boomers and Gen Xers.”

When asked what Congress can do to continue to help Americans save for retirement, Miller of ASPPA replied that for Baby Boomers with a short time frame until retirement, one important measure to retain in any tax reform is catch-up contributions. For younger folks, automatic escalation and enrollment are key services to retain, she said, suggesting the addition of “e-delivery” mechanisms to allow easier access to information.


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