EBRI’s research finds the Commission’s recommendation to cap the annual tax preferred contributions to either $20,000 or 20% of income (whichever is lower) for 401(k)-type plans – referred to as the “20/20” cap – would most affect the highest-income workers—not surprising, since those with high income tend to save the most in these kinds of retirement plans. However, EBRI also found the cap would cause a big reduction in retirement savings by the lowest-income workers as well.
analysis finds that for each age group (except for the oldest), the
lowest-income group has the second-highest average percentage reductions
in 401(k) contributions. Primarily, this is because their current or
expected future contributions would exceed 20% of compensation when
combined with employer contributions.
“Phrased another way, the
20/20 cap would, as expected, most affect the highest-income workers,
but it also would cause a very big reduction in retirement accumulations
for the lowest-income workers,” said Jack VanDerhei, EBRI research
Currently, the combination of both
worker and employer 401(k) contributions is the lesser of a dollar
limit of at least $49,000 per year, or 100% of an employee’s
The results are from EBRI’s Retirement Security
Project Model and are published in the July 2011 EBRI Notes, “Capping
Tax-Preferred Retirement Contributions: Preliminary Evidence of the
Impact of the National Commission on Fiscal Responsibility and Reform
Recommendations,” available online at http://www.ebri.org. The analysis breaks down results by age group and by relative income group.