Robert B. Stevenson: Cuts to 401(k) plans without conscience
October 27, 2017
I write to sound an alarm about proposed cuts to 401(k) plans. If you have ever contacted your senator and congressperson, now is the time and this is the issue.
I have been pension and employee benefit lawyer to many of the largest employers in the U.S. since 1976, and I have garnered highest honors in this arcane field of law. So I speak from a position of expertise on the subject.
The Republican budget, passed by the House on Oct. 26, leads to large tax cuts for wealthy people and corporations. These cuts require other revenue increases.
Outrageously, proposals are being floated to increase tax collections by reducing the amount that employees can contribute to their 401(k) plans. (Similar cuts are proposed for 403(b) plans of tax-exempt employers and 457(b) plans of governmental employers. I refer here to all of these "savings plans" as "401(k) plans.") These cuts for the wealthy would be funded in part by reductions in an already insufficient scheme of retirement savings for common folk.
When I began my career, a majority of employers provided “real” pension plans (“defined benefit plans”) to their employees. These plans were fully funded by the employer and promised employees monthly payments for life at retirement. This is money you can't outlive – a guaranteed retirement income.
In 1978, Internal Revenue Code Section 401(k) became law, allowing employees to contribute, pre-tax, to an account for their retirement. At retirement, they would receive the total of contributions and investment growth in the account and would then be taxed on the money. Once the account is spent, there is no more retirement income. And the account is funded in large part out of employees' pay.
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Employers initially viewed 401(k) plans as nothing more than a small side of coleslaw, compared to "real pension plans." But as time passed, as regard for workers diminished and as employers grew tired of funding and maintaining pension plans, 401(k) plans became the "main dish" of retirement income.
Now, only about 4 percent of employers provide a "real pension plan" alone and only about 14 percent provide a pension + a 401(k) plan. This cynical transition from real pensions (with guaranteed retirement income one can't outlive), to a self-funded "spending account" (subject to vagaries of the investment world), has been decried by retirement experts as a horrible shift.
Now, Congress is ready to eviscerate even the sub-optimal 401(k) type plans. One proposal would significantly decrease employees' ability to reduce their currently-taxable income via contributions to 401(k) plans. Instead, contributions would be made with after-tax dollars and the investment growth would not be taxed upon future withdrawal.
From the view of today's tax-cutters, this will increase taxes on employees' income currently, providing revenue needed to help offset tax cuts for the wealthy and corporations. From the view of workers, it's harder to contribute toward retirement savings if the dollars you contribute have already been shrunken to pay taxes today.
There is plenty wrong with the proposed budget and with what one hears about the murky tax reform package. But among the specific proposals that have been floated, cuts to 401(k) plans are simply without conscience — 401(k) plans are already a poor stand-in for real pension plans. But they are way better than nothing.
Do not let Congress get away with this.
Robert B. Stevenson
Stevenson has been an employee benefits attorney for more than 41 years, founded one of the first employee benefits boutique law firms in the U.S. and is a charter fellow of the American College of Employee Benefits Counsel.