New Take on the 401(k)

One provision in Democratic presidential candidate Joe Biden’s platform would replace, with a tax credit, the tax deduction workers get when they contribute to their workplace retirement plan.

Ostensibly, the idea is to “level the playing field” across income brackets. Under the current system, higher earners can benefit more from the tax deduction relative to lower-income workers because the former are able to make a higher dollar-figure contribution to their retirement plan.

The Biden campaign has not released specific details on how the tax credit would work or how widely it would be applied. Asked to contemplate the policy change, retirement industry experts had mixed opinions, though there seemed to be a consensus that such a proposal would probably be insufficient to motivate substantially higher savings rates among lower-income workers. Some recall the “myRA” concept from the second Obama/Biden administration—a federal retirement savings program that gained little traction and was ended in 2017.

Chad Parks, founder and CEO of Ubiquity Retirement + Savings, explains that, under the current system, those in a 37% tax bracket would get a $370 tax savings for every $1,000 put toward their workplace retirement plan. Obviously, for those in a lower tax bracket, that savings would be lower.

According to Parks, while the details of how a Biden tax credit would work have yet to emerge, he has heard some “alarmed reactions” from within the retirement industry.

“The antagonists are saying that if you remove the tax savings for the high earners, they will abandon workplace retirement savings,” Parks says. He observes that the Biden platform also seeks to create a renter’s tax credit—another effort to level the playing field, this time between lower-income renters and higher-income people claiming mortgage-related income tax deductions. Parks says he applauds Biden’s efforts to encourage those at the bottom of the income scale to enter the financial system.

Matt Berquist, managing director at Intrepid Capital, says he gives Biden credit for trying to find a way to equalize the tax incentives for retirement savings in this country. “However, the real question is, are we trying to equalize the tax incentives or help people save more for retirement?” he says. “We need to find a way to incentivize lower-wage earners to save more. Maybe that means giving them the tax credit and keeping the deduction for the high-wage earners.”

As it is still assessing what the policy could mean, the ERISA [Employee Retirement Income Security Act] Industry Committee has no official position on the proposal. But, says its senior vice president of retirement and compensation policy, Aliya Robinson, the association has questions.

The group’s first concern is “how would [the change] impact our current system built on the idea of a tax deduction?” Robinson says. She says she also wants to know how much of a tax credit would be offered and how the new approach would be administered and paid for.