Sean McGarry is retirement plan services manager and vice president in Rockland Trust’s Investment Management Group. In the seven years he has been with Rockland Trust, he has also been responsible for managing benefits and pensions.
McGarry has a bachelor’s degree in economics from Union College.
PBN: We’ve been hearing a lot in the past few years about possible changes to Social Security, but less about 401(k) plans. What changes have been made and what others do you anticipate for 401(k) plans?
MCGARRY: In 2012 we saw major changes that took place because 401(k) plan fees were shared with plan participants for the first time. This year, as the debate over the deficit and federal budget rages on in Washington, politicians continue to look for creative solutions, including cuts to tax incentives for the $3.5 trillion that Americans hold in their 401(k) retirement accounts. The administration’s first budget proposal includes a limit on the tax benefit certain employees receive when they contribute to a 401(k) plan, and a cap on how much they can accumulate in retirement plans and IRAs. Social Security benefits could be reduced as well, with benefits expected to grow more slowly as a result of the administration’s proposed Chained Consumer Price Index.
PBN: What impact could the proposed tax bracket changes and $3 million cap on retirement funds have on the wealthiest Americans?
MCGARRY: The tax bracket changes directly impact tax deductibility, which could leave some middle-to-high-income families in a situation where their 401(k) contribution is no longer fully tax deductible. Critics have been quick to point out that this would result in “double-dip taxation” for Americans in the 28 percent tax bracket or higher – taxation on at least a portion of their contribution going into their 401(k) account and taxation again as it comes out in retirement. The $3 million cap totals all retirement funds, including 401(k) plans, Individual IRAs and Roth IRAs, and would prevent Americans from making contributions to any plans once their investments reach the cap.
PBN: The majority of Americans fall under the 28 percent tax bracket and are far from the $3 million cap. Are they safe from impact or will tax benefit changes affect them as well?
MCGARRY: While supporters of these reforms maintain that they target only the wealthy and would therefore only directly impact a miniscule percentage of the American population, they could have far-reaching and unintended consequences for the rest of the population. Since many of the country’s small business owners fall above the 28 percent tax bracket that would be impacted by these changes, and these same individuals may hit the proposed $3 million cap on retirement plan assets as well, one potential outcome is that they may reconsider the need to sponsor a retirement plan at all. If business owners no longer receive the same tax benefits for their own retirement
plans, it is less likely that they will sponsor plans for their employees, as the cost and complexities associated with offering 401(k) plans makes it difficult for employers to support them while still turning a profit.
PBN: Our region has a large number of small businesses. What are the advantages, or disadvantages, for them in sponsoring a 401(k) plan for employees?
MCGARRY: While there are regulations that need to be followed and there is an expense to hiring firms to help business owners adhere to these rules, an employer sponsored plan, especially one that matches the employees contributions, is a huge benefit that could help attract and retain top talent. As the future of Social Security remains up in the air, it’s increasingly important for employees to save for retirement on their own. Data from the Employee Benefit Research Institute suggests that more than 70 percent of workers who earn between $30,000 and $50,000 annually participate in their employer’s 401(k) plan, while only five percent save for retirement without the benefit of an employer-sponsored plan.
PBN: What are your recommendations for ensuring a comfortable retirement, regardless of future changes to tax benefits?
MCGARRY: It’s more important than ever for individuals to save for retirement on their own, given the unclear future of tax benefits and Social Security. A good way to begin is by checking to see if their employer offers a company match and make it a priority to at least save the amount that the company will match. Beyond that, we recommend employees defer 10 percent of their gross wages – that’s typically a good recipe to establish a foundation of personal retirement assets. Every situation is different, so it is a good idea to work with a financial professional or take the time on your own to create a budget for what income you will require through your retirement years, and then make sure you create a savings plan around that.
