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Godfather of Auto-Enrollment Defends Cutting 401(k) Limits

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When Congress passed the Pension Protection Act of 2006, paving the way for greater use of auto-enrollment in 401(k) plans, lawmakers rationalized the landmark policy largely on the work of a few economists.

One was Richard Thaler, the recent recipient for the Nobel Prize in Economics based on his research on behavioral economics, who first began writing about automatic enrollment and escalation in 401(k)s in 1994.

On Twitter last week, the Nobel laureate staked out an unpopular position on the question of whether Congress should limit pretax contributions to 401(k)s as a part of tax reform.

“Unpopular observation,” wrote Thaler. “Reducing the limit on 401(k) contributions is massively progressive.”

Tax-preferences on traditional 401(k) contributions benefit the wealthy in two ways, Thaler wrote. “They save more and get a bigger tax subsidy. Very few max out.”

The University of Chicago economist’s position in support of lowering the tax preferences on 401(k) contributions set off hours of feedback on the social media platform.

Comments ranged from the boorish, to input from respected industry voices like Skip Schweiss, president of TD Ameritrade’s trust company; Michael Kitces, CFP and author of the Nerd’s Eye View blog; Aron Szapiro of Morningstar; and Shai Akabas, an economist at the Bipartisan Policy Center.

In one exchange, Thaler suggested there were alternatives to tax incentives to motivate savings rates.

“Just set the default at 10 percent for example,” wrote Thaler. “No reason to subsidize saving by the rich.”

Details on exactly how traditional 401(k) contributions will be implicated under tax reform have been kept under wraps by lawmakers.

Lawmakers are said to be considering capping pretax contributions to 401(k) plans at $2,400.

Rep. Kevin Brady, R-Texas, the chief tax writer on the House Ways and Means Committee, has confirmed that treatment of 401(k)s remains under discussion, in spite of President Donald Trump’s vow to protect retirement savings contributions.

Brady told BenefitsPRO, a partner site to ThinkAdvisor, that Universal Savings Accounts were among the policy options being considered. Those would allow all Americans to invest a limited amount of after-tax dollars that could grow tax-free and be withdrawn at will, for any purpose, without the penalties associated with early withdrawals from 401(k)s.

In reporting in The Wall Street Journal, Brady suggested that higher contribution limits to 401(k)s were also being considered.

A first view of the tax bill is slated for Wednesday. The Ways and Means Committee will begin considering the bill mext week.

Thaler did not respond to a request for comment via email by press time.

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