On the same day the GOP majority in the House of Representatives released its preliminary draft of a sweeping tax reform proposal, Burton Keller, an executive vice president with Delta Data, sat down with PLANADVISER to offer his thoughts about how the ongoing tax debate may intersect the retirement planning industry—whether or not 401(k) accounts in particular are targeted as source of new revenue.
Important to note at the outset, the draft text of the legislation has just been released and appears to leave 401(k) account tax-deferral limits alone. The nearly 500-page tax bill builds on a nine-page framework previously released by the GOP, with a number of important changes. For example, the draft legislation calls for four main tax brackets, rather than the three called for in the framework. It will, of course, take more time to absorb more subtle details in the technical legislation, but so far the retirement industry reaction has been cautiously positive.
“We are very encouraged that this draft protects the tax incentives for retirement accounts,” says Dale Brown, Financial Services Institute president and CEO. “In addition to retirement savings incentives, FSI has long supported tax reform that safeguards the important role of independent contractors in our economy, and provides equitable treatment of pass-through entities operated by financial advisers. We look forward to working with members of Congress and the administration throughout this process to ensure the final tax reform bill achieves these purposes.”
American Benefits Council President James A. Klein released the following statement upon the release of the Tax Cuts and Jobs Act: “Promoting savings, investment and economic growth is the goal of tax reform and retirement plans are how Americans save and invest. We are gratified today’s proposal lets workers save for retirement in the way that best meets their financial security needs. We will work with Congress to ensure that retirement savings is protected as the tax reform process moves forward.”
Echoing the responses of advisers and providers, Burton explains he is “generally not in favor of touching the 401(k),” and so he is gratified to see that the draft legislation does not go after 401(k) deferrals as a source of new revenue. However he is also still cautious, knowing that the bill has not even received a full markup and has yet to see a single minute of debate on the House floor. When one further considers the road the bill will eventually have to take through the more evenly divided Senate, its future is very far from certain at such a preliminary juncture.
Burton urges readers to take a step back and think about the long-term implications of this discussion—rather than getting fixated on the interim details. Sadly, he suggests, every time there is a tax reform debate that even mentions retirement accounts, it can have a detrimental effect on the savings habits and philosophies of real people.
“The idea is that people will start to worry about not being able to trust that the tax system will be the same when they retire as it is now,” Burton explains. “What we are seeing right now is the simple fact that the government, or more accurately the party in the bicameral majority, can simply change the tax policies as it sees fit. If the government can simply change the policy later, how do you make a genuine long-term plan? If you’re 25 or 30 years old, you could see the tax picture change multiple times before you retire.”
Burton suggests this lingering sense of uncertainty is not as direct a problem as would be sharply curtailing the amount of money that people can save pre-tax in their 401(k)s—but it’s still a very real and important challenge to confront. The only real solution, he argues, would be successfully instilling a greater understanding in both the public and among legislators that the success of defined contribution retirement planning is a universal issue for our society.
“At a macro level, as long as those folks working in the government talk about tinkering with the tax laws surrounding our retirement system, there will always be a sense of unease about the future, which will dampen savings,” Burton concludes. “If they end up bucking this draft legislation and they move to make real changes right now to tax all contributions in a Roth style, there is nothing stopping them from moving in 10 years to tax those withdrawals as well. There is literally no way to know what they will do if the current attitude stands. We must fight to create a new ethos around protecting private retirement savings, now and in the long-term future.”