Capping pension savings sends wrong message

A provision in President Barack Obama’s 2014 budget, recently submitted to Congress, would limit the aggregate balance of all your combined retirement accounts to “an amount needed to fund reasonable levels of compensation in retirement” currently identified as $205,000 per year, or an aggregate balance of $3.4 million.
Unlike most pension limits which adjust upwards over time, this amount will adjust downward as historically low interest rates rise. So, if you have been smart, diligent or lucky enough to accumulate a large retirement-account balance, then you really won’t like what happens once interest rates inevitably rise from their current historically low levels and that limit comes down!
For example, some estimates are that if interest rates rise back to their 2006 levels, the aggregate balance limit could drop from $3.4 million down to $2.2 million.
There have always been limits on retirement-plan contributions, but if this provision passes it would place limits on accumulations for the first time.
American workers have always been told: “work hard, start saving early and invest wisely.” This proposed limit sends a contradictory message at a time when retirement saving needs to be encouraged not discouraged.
The provision focuses on the wrong thing: The current “crisis” in retirement plans is not people saving too much, it’s people saving too little. According to The Employee Benefit Research Institute (EBRI) only 66 percent of workers today are saving for retirement versus 75 percent in 2009.
Confidence in retirement savings
EBRI also noted that 28 percent of workers have no confidence they’ll have enough money in retirement, the highest number in the survey’s 23-year history. It’s no wonder: According to Fidelity’s annual retiree health care costs estimate, a 65-year-old couple retiring in 2012 will need an estimated $240,000 just to cover health care costs during their retirement. Fidelity also notes that: “According to the U.S. Department of Health and Human Services, about 70 percent of people age 65 and older will require some type of long-term care services … either at home, in adult day care, in an assisted-living facility, or in a traditional nursing home.” Retirement is expensive.
This comes at a time when Social Security is weakening and Americans are living longer. According to the Social Security Administration, “About one out of every four 65-year-olds today will live past age 90, and one out of 10 will live past age 95.” With fewer companies offering pensions, rising health and long-term care costs and increased longevity, personal retirement savings have become more important than ever!
Unintended consequences
An unintended consequence of this regulation is it could make retirement saving and investing more expensive for all workers. The cost to financial-service companies of having to track aggregate balances across all of a saver’s accounts – including all IRAs, 403(b)s and 401(k)s, even old, inactive ones – is substantial. These cost increases will be passed on to retirement savers in the form of higher retirement-plan investment fees and expenses, making it harder for working Americans to accumulate adequate retirement savings. If the burden of tracking balances must be shared by employers, it will have an even greater detrimental effect, acting as a direct disincentive for employers to offer these plans.
Another unintended consequence could be small-business owners terminating the company retirement plan once the owner reaches the proposed $3.4 million (or $2.2 million) limit, loses the tax benefit and, therefore, is no longer incented to offer a plan. According to the U.S. Small Business Administration, small businesses employ 52 percent of American workers. This unintended consequence would harm all small-business employees by eliminating their opportunity to save through their employer-based plan. Complexity on top of regulation
How will these limits be tracked among a saver’s various accounts as she changes jobs, joins different 401(k) plans, or rolls over to IRAs over the course of her working career? These regulations add complexity on top of already costly and complex retirement-plan rules such as the fee-disclosure legislation that went into effect last year. That legislation was well-intended but by all accounts created reams of paper and legalese that no one read.
This regulation creates a great deal of work for employers’ human resource and finance departments, and adds costs to service offerings.
Ultimately, financial-service companies, or worse, employer-plan sponsors will be forced to report and track annual balances to comply with this law so all balances can be aggregated. These costs will increase fees and expenses for all American workers. This provision could undermine efforts to encourage more saving by making retirement plans more expensive and causing employers to terminate plans in the face of rising complexity. It would be similar to what happened in the defined-benefit-pension arena – potentially leaving workers in a worse position than they are today.
Hopefully, some good will comes of the debate surrounding these budget provisions that will strengthen America’s retirement-plan system, especially for lower- and middle-income workers. •


James L. Worrell is president and managing director of GPS Investment Advisors / 401(k) Advisors. He can be reached at jworrell@investorgps.com.

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