Insights | Published in May 2017


The tax treatment of retirement plans

By Alison Cooke Mintzer | May 2017
PS-Portrait-Article-Insights.jpgIs our retirement plan system under attack? For weeks, as the country waited to see what tax reform would mean for this president and Congress, multitudes of articles appeared on news sites across the country, including ours, referencing what experts hypothesized might be at stake. Many of these articles discussed potential changes to the employer-sponsored defined contribution (DC) retirement plan system—specifically 401(k) plans. Ideas such as elimination of the 401(k) tax deferral, mandatory Roth contributions and change to limits were all mentioned.
However, when President Donald Trump’s tax proposal was released, the 401(k) system seemed safe. “We are going to eliminate most of the tax breaks that mainly benefit high-income individuals. Home ownership, charitable giving and retirement savings will be protected—but other tax benefits will be eliminated,” said Gary Cohn, chief economic adviser to President Trump and director of the National Economic Council, in a statement. However, the vagueness of the phrase “retirement savings” led some to believe 401(k) plans might still be at risk.
Then, for about 10 to 15 minutes that week, my team was preparing to get commentary discussing what would happen if the president’s tax plan eliminated the 401(k) tax deferment/deduction when Press Secretary Sean Spicer, during his daily press briefing, seemed to say the administration’s tax proposal might do just that. However, a few minutes later, the White House clarified that, in fact, this was not the case.
Of course, from my standpoint as the editor of a magazine that focuses on employer-sponsored retirement plans, it would be counterproductive to think that such a suggestion would be anything but harmful. As one of my team members said, “I don’t mean to get all political here, but how could gutting the 401(k) tax deferment system be viewed as a good idea?” I have to agree. Yes, I know that our industry is seen as a colossal expense because of the way the Congressional Budget Office (CBO) scores revenue. Tax-deferred retirement plans are seen as an expenditure to the government because much of the revenue associated with them will not be recovered within the 10-year window the CBO uses for budgeting—which has always struck me as short-sighted. The trillions of dollars in the retirement plan system could be viewed as an annuity for the government if the CBO changed its strategy—and, as we know, income for life is an excellent benefit.
The idea that the retirement plan system might be under attack is nothing new—early in my career, under President George W. Bush, I spent years learning about, and writing articles about, his proposals for revamping the retirement and savings account system. However, there has been a sense that perhaps this time, changes are more probable.
I turned to Twitter right after Press Secretary Spicer made his unsettling remarks and was amazed to see that the responses of many aligned with my own—most were from people upset at the inference that their savings opportunities might be taken away. It was refreshing to see such responses—see the value people recognize in their retirement plans. Suddenly, when there may be changes to the fundamentals behind our retirement plans, you see articles with titles “Grab Your Pitchforks, Your 401(k) May Need Defending From Congress” in the Wall Street Journal. I just wish that sentiment was always the case.
The editorial team at PLANSPONSOR receives multiple news alerts each day tracking various topics, online. For obvious reasons “401(k)” is one of the keyword search terms. That alert comes once, if not twice, per day. As of late, this hasn’t always been the most upbeat segment of articles, and if one was to just read the negative headlines, one might think that the plans are not of value to employees or not a good way to save. After all, frequently the articles are written about poor or opaque investment options, or high fees—all of which may be contributing to the rise in participant lawsuits.
In checking Twitter and our news feeds the days after the tax plan was released, I was relatively amazed at the contradiction I saw between the articles that take a negative posturing or consistently suggest 401(k)s are fleecing their participants, but as soon as the plans might be taken away, it’s a call for all hands on deck to protect those same plans. Many times, these alarms do spur action, whether on Twitter or in comment letters to the Department of Labor (DOL), and one can only hope such opinions are heard.
I’m optimistic that the tax treatment of retirement plans will remain, as I can’t see any way in which eliminating it would help the broader issue and concerns regarding coverage or availability. But I am also hoping that perhaps this threat of having the retirement system dismantled will lead to an enhanced appreciation of employer-sponsored plans and increased participation and savings. Could the whiplash around tax cut discussions actually be worth the stress?
—Alison Cook Mintzer, Editor-in-Chief