Cap on Savings Raises Industry Hackles

President Obama’s proposed budget once again looks to cap retirement plan savings to about $3 million per investor.

Several advocacy organizations—ERIC, ICI and ASPPA—issued statements weighing in on President Obama’s proposed fiscal 2016 budget, with adjectives and comments such as “misses the mark” … “wrongheaded” … “disappointing.”

All expressed disapproval at the idea of limiting the amount savers may stash, pre-tax, in retirement accounts, a savings cap that resurfaces annually.

Judy Miller, director of retirement policy for the American Society of Actuaries and Pension Professionals (ASPPA), maintains that some parts of the budget could expand retirement plan coverage, but others are likely to undermine them.

ASPPA favors the president’s proposals to encourage workplace retirement plans. Employers with 10 or more employees and no retirement plan would be required to offer a workplace auto-IRA (individual retirement account). Employers who do offer these programs would receive an enhanced tax credit.

Also, Miller notes in her statement, the budget would triple the start-up credit for qualified retirement plans and, for the first time, offer a credit of $1,500 to small-business owners who add automatic enrollment to an existing 401(k) plan. “These are all good ideas,” Miller says. “Why couple these proposals to expand coverage with proposals that would discourage small-business owners from maintaining the 401(k) plans they have now?”

According to Annette Guarisco Fildes, president and CEO of The ERISA Industry Committee (ERIC), the proposal to cap benefit amounts in tax-favored retirement plans and IRAs misses the mark and should be rejected.

“The proposal would create a disincentive for retirement saving, as well as a compliance nightmare for plan sponsors and retirement savers alike,” Fildes says. “Tax-favored retirement savings accounts already have strict limits on the amount of annual benefits and contributions that can be made by employers and employees. Policymakers should be considering ways to expand and not discourage savings opportunities.”

ICI Frowns on Cap

The Investment Company Institute (ICI) also strongly opposes the limits. Paul Schott Stevens, president and chief executive of ICI, calls policy changes of this kind “simply wrongheaded” and recently released an annual household survey that shows Americans oppose changing the tax incentives for retirement savings.

According to Stevens, the proposals would penalize workers trying to save for retirement and discourage employers from offering plans, while adding unnecessary complexity to retirement savings. Instead, the government should be encouraging more employers to offer plans and giving more workers incentives to participate in workplace-based retirement plans.

“To its credit, the administration recognized the importance of saving for the future when it retreated from a proposal to impose new taxes on college savings accounts [529 accounts],” Stevens says. “Maintaining current tax incentives that help Americans prepare for retirement is just as critical.”

Miller points out that Obama’s own pension, based on reasonable actuarial assumptions, is worth about $5 million. “Why is a $3 million cap considered appropriate for a small-business owner who has saved on [his] own for retirement?” she asks. “Worse, under the ‘double taxation’ budget proposal, small-business owners and others earning more than $250,000 would have to pay tax on contributions in the year the contributions are made and then pay tax at the full rate when contributions are distributed at retirement.”

This would amount to a penalty for saving through a 401(k) plan, Miller contends. “If a small-business owner is going to be penalized for saving in a plan, or not allowed to make additional contributions to that plan, what’s [his] incentive for continuing to participate in, and ultimately even offer these plans?” Employees who lose access to saving through a retirement plan at work would be the real losers in this scenario, she says.

The budget would also allow the Pension Benefit Guaranty Corp. (PBGC) to set risk-based premiums based on its determination of the creditworthiness of a plan sponsor, which ERIC strongly opposes as an inappropriate and impractical expansion of government authority that would hurt plan participants and plan sponsors.

Same Old?

“This proposal continues to resurface each year,” Fildes says. “Putting the PBGC in charge of determining not only the amount of the premium that individual employers pay, but also the means by which they are set—with no effective oversight from Congress or another neutral party—would create a direct conflict of interest.”

The budget would raise the tax rates on capital gains and dividends, which ICI says are critical to investment and savings opportunities. “The effective tax rate on investment income already has increased substantially under President Obama,” Stevens says. “ICI has long advocated for lower taxes on capital gains and dividends earned by investors—Americans who are saving for college education costs, a home purchase or other financial goals. The administration’s piecemeal approach of increasing tax rates on capital gains and dividends once again simply underscores the need for a comprehensive tax plan designed to stimulate economic growth and not simply punish the nation’s savers and investors.”

Fildes says that ERIC supports the administration’s underlying goals to expand access to, and the portability of, retirement savings, but cautions that policymakers should first do no harm. “Unnecessary and complex administrative burdens undermine the ability of large employers to provide robust and tailored retirement benefits to their workers,” she says. “ERIC is committed to preserving and enhancing the successful voluntary employer-sponsored retirement system.”

The U.S. retirement system is already working well for millions of Americans, with retirement tax incentives the key to the system’s successes and strengths, says Stevens.

Miller notes that the $3 million cap has found its way into past budgets but not into any legislative proposals. “Unfortunately, the same cannot be said for the double-taxation proposal,” she says.

A failed proposal in the last Congress by then-Chairman of the House Ways & Means Committee Dave Camp, R-Michigan, would have double-taxed both employer contributions and elective deferrals. “The president’s proposal to double-tax elective deferrals could still be tempting to some looking to raise revenue but who may not fully appreciate the impact of that change on plan formation or employer support for these programs,” Miller says.