Senators: Don't futz with retirement savings plans

Bill introduced to protect tax advantages for 401(k)s, IRAs and the like

By Darla Mercado

Dec 10, 2012 @ 12:23 pm (Updated 12:54 pm) EST

retirement plans, 401(k), Richard Blumenthal
Blumenthal: Sees savings grace

Retirement industry groups late last week rallied around a proposal championed by Sen. Richard Blumenthal, D-Conn., and Sen. Johnny Isakson, R-Ga., to protect the tax incentives of saving in retirement plans.

This so-called “sense of the Congress” resolution stressed that not only do tax incentives for saving in plans play a major role in encouraging plan sponsors to maintain the plans and pushing participants to contribute, but they also have increased the number of people who are covered by a retirement plan.

As the attention turns to reducing the deficit and cutting tax expenditures, retirement plans once again have come under scrutiny. A proposal in 2010 by Alan Simpson and Erskine Bowles, co-chairmen of the National Commission on Fiscal Responsibility and Reform, tackled expenditures tied to retirement savings, capping tax-preferred contributions to the lower of $20,000 or 20% of income.

Mr. Blumenthal and Mr. Isakson said $4.7 trillion is held in 401(k), 403(b), 457 and other defined-contribution plans, while another $2.3 trillion is currently in private defined-benefit plans. Individual retirement accounts hold nearly $5 trillion, with much of that amount coming from rollovers from workplace retirement plans.

The accounts have been a boon for lower- to middle-income earners, as more than 70% of workers making between $30,000 and $50,000 annually are contributing to their own retirement when they have a savings plan at work, according to the proposal. Three years ago, 79% of federal tax incentives for DC plans were attributable to taxpayers with less than $150,000 in adjusted gross income.

Mr. Blumenthal and Mr. Isakson said that a reformed and simplified tax code must include tax incentives to maintain these plans. Mr. Blumenthal represents Connecticut, which is home to a number of large insurance companies. Some of the carriers market retirement savings vehicles or provide offerings to 401(k) plans.

Senators backing the bill as co-sponsors include Chuck Grassley, R-Iowa, Rob Portman, R-Ohio, Jon Tester, D-Mont., Daniel Akaka, D-Hawaii, Sherrod Brown, D-Ohio, Ben Cardin, D-Md., Jeff Bingaman, D-N.M., Kay Hagan, D-N.C., and John Boozman, R-Ark.

A collective of retirement industry groups, dubbed The Coalition to Protect Retirement, rallied in support of the proposal. The coalition is made up of nine organizations, including the American Council of Life Insurers, the American Society of Pension Professionals and Actuaries and the Securities Industry and Financial Markets Association.

The concern from the groups is centered largely on reducing the contribution limits into these savings plans, said Ed Ferrigno, vice president at the Plan Sponsor Council of America, a member of the coalition. The impact is especially harmful for smaller employers and their workers.

“It's not like small-business owners are putting money into the plan to benefit themselves; they're paying for the match and a share of the administrative cost,” Mr. Ferrigno said. “If they are discouraged, we know absolutely there will be fewer plans and people saving for retirement."