Think tank urges cutting contributions to tax-deferred plans

A proposal to cut by more than half the total amount employers and employees may contribute to their defined-contribution plans could spur some employers to kill the plans, industry lobbyists say.

The proposal by the Bipartisan Policy Center, an influential Washington think tank headed by high-profile former federal policymakers, is supported by the Economic Policy Institute, a think tank that focuses on worker issues. It was unveiled last month.

“This would undermine the willingness of employers to offer plans,” said Ed Ferrigno, vice president of Washington affairs for the Profit Sharing/401k Council of America.

“It cuts any interest that managers would have in maintaining plans, and it would drive many more management employees into non-qualified deferred-compensation plans,” said Mark Ugoretz, president of the ERISA Industry Committee.

“I would hate to see that happen,” said Sheryl Wright, director of human resources for Teledyne Isco Inc., which had assets of $410 million in its 401(k) plan as of Dec. 31. “More people need to save more for retirement because Social Security eventually may not be at the levels we have today.”

Under the proposal — included in the Bipartisan Policy Center’s “Restoring America’s Future” report — the total combined tax-deferred contributions that employees and employers could make would be limited to 20% of an employee’s annual earnings, or $20,000, whichever were smaller.

The current combined employer/employee cap is $49,000 a year.

Lowering the contribution caps is part of the Bipartisan Policy Center’s larger plan to enhance federal tax revenue and reduce tax expenditures.

“The task force plan will let most individuals retain the ability to contribute enough to qualified retirement plans to accumulate enough tax-free assets to purchase an annuity that replaces a substantial share of their earnings in retirement. However, qualified plans no longer will be a vehicle for wealthy individuals to convert a substantial share of their assets into tax-free retirement assets,” according to the center’s report.

“In addition, to spur saving by rank-and-file workers, the plan will introduce an expanded and refundable savings credit for taxpayers in the 14% bracket,” the report said.

‘RIGHT DIRECTION’

“That would be a step in the right direction. People who can contribute the maximum to their tax-favored savings accounts don’t need more help saving,” said Monique Morrissey, an economist with the Economic Policy Institute.

Heading the task force that wrote the report are former Sen. Pete Domenici, an Arizona Republican and former chairman of the Senate Budget Committee, and Alice Rivlin, director of the White House Office of Management and Budget during the Clinton administration.

Although relatively few employees benefit from the full $49,000 annual tax-deferred contribution, lobbyists said that lowering the potential benefits for highly compensated employees undermines their support for the plans.

Federal policymakers “are going to do for defined-contribution plans what they did for defined-benefit plans: make them less attractive and less available,” Mr. Ugoretz said.

“We believe the tax incentive structure currently in place is a pillar of our successful employment-based retirement system,” Lynn Dudley, senior vice president for policy at the American Benefits Council, wrote in an e-mail. “Changes should not undermine the central foundation upon which the successes of the system are built.”

MAJOR PRIORITY

Adding to lobbyists’ concern is that efforts to cut the federal budget deficit are expected to be a major priority when Congress reconvenes in January — and tax-deferred contributions add to the deficit.

Along with the Bipartisan Policy Center, the White House National Commission on Fiscal Responsibility and Reform is considering cutbacks in retirement savings incentives. But unlike the center, the commission is considering a plan to reduce the deficit by cutting existing tax breaks to corporate DC and DB plans alike, not just contributions to DC plans, according to a senior commission official, who asked not to be identified.

The fiscal commission, led by Alan Simpson, a former Wyoming Republican senator, and Erskine Bowles, who served as chief of staff to former President Bill Clinton, was to make its deficit-cutting recommendations last week.

How influential the recommendations of the Bipartisan Policy Center and the fiscal commission will be on the policymaking process remains to be seen, but industry lobbyists have to take the proposals seriously, Mr.Ugoretz said.

“I don’t know if this stuff is going to go anywhere or not, but we have to behave as if it is,” he said.

Doug Halonen is a reporter at sister publication Pensions & Investments.