As the Trump administration and lawmakers consider amending the treatment of qualified retirement savings contributions to fund tax reform, they will have to reckon the impact that would have on savings rates.
They’ll be doing so with limited data on how “Rothification” would affect the $7.3 trillion defined contribution market.
Lawmakers are reportedly considering moving all or some portion of the defined contribution market to a Roth, or after-tax model, to bring tax revenues into the 10-year budget window.
Many in the retirement industry fear that would put downward pressure on savings rates at a time when the country is often described as being in a retirement crisis.
On the one hand, lower marginal rates that result in higher take-home pay could offset the benefit of tax-preferences on 401(k) and other defined contribution deferrals, which individuals can deduct from their taxable income.
On the other hand, some policy experts say it is conceivable that tax reform could actually bump some savers into a higher tax bracket. Other lower-wage earners may not see their marginal rate impacted by reform.
Those possibilities raise the question as to whether or not the existing tax incentives for retirement savings provide greater tax relief than lower rates, at least for some Americans.
“We just don’t know enough about what is being proposed, nor can we predict the future,” said Jack Towarnicky, executive director of the Plan Sponsor Council of America.
“It is impossible to say who is going to be a net tax winner and a net tax loser as a result of the changes,” added Towarnicky.
The PSCA, an advocate for employer sponsors of retirement savings plans, is part of the Save Our Savings Coalition, formed this year to lobby to preserve the existing tax treatment of retirement savings plans. The SOS Coalition includes AARP, employer advocates, benefits consultants, and asset managers.
A recent study published in the Harvard Business Review showed plan participants contributed to traditional 401(k) plans and Roth plans at equal rates. Other data from record-keeper Alight Solutions—formerly Aon Hewitt—shows participants actually increased savings rates when they migrated to Roth 401(k)s.
But those studies may not provide sufficient evidence of how Rothification under tax reform would impact overall savings rates.
“They were only able to study the impact of Roth on a voluntary basis, and the Roth option is likely limited to individuals who have sufficient resources to continue the same 401(k) contribution rate and lose the tax exemption,” Jack VanDerhei, research director at the Employee Benefit Research Institute, recently told BenefitsPRO.
“Those individuals most likely to be subject to a budget constraint under a Roth system may not be in the data,” added VanDerhei, referring to the Harvard study. EBRI, which the SOS lists as an educational partner, is scheduled to release a study assessing how Roth savings impact lower wage earners.
Best evidence may be found in history of IRAs