Reuters Money
Will Congress slash your 401(k) tax break?
Is Congress getting ready to slash the tax deduction on retirement saving?
The deductions on IRAs and 401(k) contributions is one of the deficit reduction options known in Washington as “tax expenditures” — that is, revenue the government foregoes through deductions, exclusions or exemptions. Overall tax expenditures — which also include deductions for big-ticket items such as mortgage interest and employer health plans – are worth more than $1 trillion a year.
The retirement saving deductions for pensions and defined contribution plans cost $143 billion in 2010, according to the federal Office of Management and Budget; some argue that the cost really is lower, since the deductions are deferrals of taxes that are paid down the road in retirement.
President Obama’s National Commission on Fiscal Responsibility and Reform recommended capping combined employee/employer pre-tax contributions to 401(k)s at $20,000 or 20 percent of income, whichever is lower. That would be a substantial cut in deductibility, since the employee deduction alone currently is capped at $16,500 (savers over age 50 can make additional $5,500 “catch-up” contributions).
The commission also recommended expanding the saver’s credit, which helps lower-income savers by allowing a credit of $1,000 for individual filers ($2,000 on joint returns) on a percentage of qualified contributions.
Meanwhile, the House Subcommittee on Health, Employment, Labor and Pensions heard testimony earlier this week on limiting the retirement deduction.
This might be Washington’s second most important retirement policy regulatory issue — coming right after the Department of Labor’s preparations to add fiduciary responsibility to workplace retirement plan platform providers. Yet the odds look long for any immediate action on retirement savings deductibility. “Is it likely to be a big part of anything prior to the 2012 election? Probably not,” says Dallas Salisbury, president of the Employee Benefit Research Institute (EBRI).
Are investors under 40 too risk averse?
Are today’s 20- and 30-year-olds less willing to take investment risk following the latest bear market and recession than their age group was in earlier times?
Some are, and some are not.
As stock prices have gone through wide swings in recent memory — with the Standard & Poor’s 500 Index plunging 57 percent from its all-time high of October 9, 2007 to the low of March 9, 2009 and then bouncing back nearly 100 percent — it’s understandable that young investors would have varied reactions.
Their views of market risk have depended not only on how much money they can afford to invest but also on the ways they invest: as employees in 401(k) defined contribution (DC) plans, individuals invested in IRAs, people investing outside tax-deferred accounts, “non-working” spouses self-employed and so on.
What’s more, opinions also could have depended increasingly on relatively new DC plan factors whose significant features may not yet be widely understood.
The importance of greater understanding was brought out at the recent annual meeting of the Investment Company Institute, when ICI Chairman Edward C. Bernard gave special attention to investors under 40 as he recalled recent ICI investor surveys’ findings that “across a wide spectrum of ages, investors have a reduced appetite for risk.”
“What’s particularly striking,” the T. Rowe Price Group vice-chairman says, “is that … Americans born in the 1970s — today’s 30-somethings … are less willing to take investment risk than their counterparts born in the 1960s … this group is shy about investing in stocks.” In 2010, the share of households headed by 30-somethings that own stocks was lower than in any other cohort born after the Great Depression, he noted.
The best thing you can do, it to become an active trader, and stop trusting your money to others. In particular the “Professionals” who either only make money in an up market or by “churning” an account. The key greater equity investment, in our young is education about trading. Become a student of money and training. http://www.creditspreadsystem.com My son age 20, has been trading credit spreads, since he was 17. To be the victor, not the victim.
The role for DC plans in the public sector
Alicia H. Munnell is the Director of the Center for Retirement Research at Boston College and the Peter F. Drucker Professor of Management Sciences at Boston College’s Carroll School of Management. The opinions expressed here are her own.
In the wake of the financial crisis, policymakers have been chattering about moving to defined contribution (DC) plans in the public sector. Defined contribution plans may well have a role in the public sector, but not as an alternative to defined benefit (DB) plans. Defined benefit plans should remain as a secure base for the typical public employee and defined contribution plans could be “stacked on top” of them to provide additional retirement income for those at the higher end of the pay scale.
Before the financial crisis, ten states had introduced some kind of comprehensive DC plan. Many of these states provide stand-alone DC plans, either as a requirement (Alaska and Michigan) or an option. Two states (Oregon and Indiana), however, recognizing the value of offering some secure benefit, provide a combined DB/DC plan.
In the wake of the financial crisis, three states (Michigan’s public schools, Georgia, and Utah) have introduced such combined DB/DC plans, where new employees will get some of their retirement income from each type of plan. And an additional six states are discussing DC options.
Why the enthusiasm for DC plans? Some arguments are wrong; others hold water. Starting with wrong: Some supporters highlight the magnitude of the unfunded liabilities in public sector DB plans as justification for switching to a DC. The reality is that even with a new DC plan, states and localities are still left to deal with past underfunding. A new plan only addresses pension costs going forward, it does not help close the current gap between pension assets and liabilities.
Similarly, some contend that switching to a DC plan would save money in the future. But for any given level of benefits, DC plans have higher investment and administrative expenses than DB plans. Some proponents think that even if total costs increased, taxpayers could gain by shifting contributions from the government to the employee.
Transferring the burden to the employee provided a major economic incentive in the private sector to move from DB plans, where employees make no contributions, to 401(k) plans, where employees make the bulk of the contributions. But such a gain is difficult to achieve in the public sector where employees already make substantial contributions to their DB pensions.
Defined-benefit plans are a trap. Once you have a decade in the system, you literally cannot afford to leave. You may get your contributions back, but none of the investment earnings — which after contributing 11% of your paycheck for a decade ought to be substantial.
I’ve known several tired and bitter teachers, hanging on for five more years just to qualify for their full pension. What kind of “defined benefit” is that? On the flip side, I know a couple of teachers who worked a decade BEYOND maxing out their pension. A decade in which their contributions continued to earn money for the system but the benefits stagnated.
The biggest reason why DC plans don’t accumulate as much as DB plans is that participation is not forced. DC workers can opt out. DB workers cannot — I tried and was refused. All the control in the DB system rests with the state. But have no fear! Big Brother is generous. Big Brother is wise. Big Brother will take care of you. We all love Big Brother!
Retirement: 3 problems with automated 401(k)s
Automation of workplace retirement plans has spread rapidly in recent years. But don’t make the mistake of taking your foot completely off the gas pedal if your employer has installed retirement cruise control.
The Pension Protection Act of 2006 (PPA) set the stage for plan sponsors to step up automatic opt-in enrollment for new workers, and it’s resulted in much higher plan participation rates. Growing adoption of other automation features have helped to address the hard reality that most workplace retirement savers pay little or no attention to their contribution levels, rebalancing or mutual fund selection.
But automation comes with drawbacks that can hurt long-term performance of your retirement portfolio. If you’re using default options, it’s time to start paying attention — and watch out for these three potential potholes:
One: Low default contribution rates
More than half of large plans set initial contribution rates for auto-enrolled workers at three percent, according to a survey of large defined contribution plans by the the Defined Contribution Institutional Investment Association (DCIIA), a non-profit industry consortium focused on the institutional retirement industry. This despite the fact that survey respondents acknowledge that the optimal rate is 10 percent or more.
The disconnect stems from a PPA provision that defines three percent as the contribution rate that provides safe harbor protections for plan sponsors, says Cathy Peterson, director of retirement insights at J.P. Morgan Asset Management and co-author of the DCIIA study. “Many plan sponsors don’t want to be out of line with the industry,” she says. “The three percent rate is viewed as the benchmark.
The economy also plays a role. Eighteen percent of respondents said higher initial contribution rates would require them to make higher matching contributions that they can’t afford right now.
401k automation tools such as auto-enrollment, auto-escalation, and auto-default into an appropriate investment portfolio are merely tools that plan sponsors may use to reach a defined objective. Simply implementing any or all auto-features without a clear understanding of the desired result could actually do more harm than good to plan participants.
A number of considerations must be made when implementing auto-features because many plan features and provisions are interrelated. For example, most plan sponsors do not consider the impact of their current distribution provisions when considering a target date fund glidepath. Many target date fund glidepaths assume that a participant will stay invested throughout their retirement years. However, the vast majority of 401k plans do not allow for systematic withdrawal. Instead, once a retired participant needs to initiate a distribution, most 401k plan sponsors require the distribution to be taken in a lump sum, thereby causing disconnect between the intent of the target date fund glidepath and the plan’s distribution provision.
Automatic features are indeed terrific tools that help plan sponsors efficiently help their employees participate and invest in their 401k. However, like any tool, if misused, they can lead to unintended damage to participants’ retirement readiness.
Sanders Booze Capital Advisors, LLC
Another attack on the middle class, plain and simple.