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Budget blueprints and 401(k)s

Chris Farrell Mar 20, 2012

Serious proposals to deal with the federal government’s debt and deficit often involve changes to the treatment of 401(k) plans (and other retirement savings plans).

For example, the National Commission on Fiscal Responsibility and Reform — better known as Simpson-Bowles — proposed a tax reform plan that would cap annual “tax-preferred contributions to [the] lower of $20,000 or 20% of income.” The Employee Benefits Research Institute (EBRI) calculated the impact of that proposal and another debt-and-deficit reduction blueprint by William Gale, economist at Brookings Institution in Modifying the Federal Tax Treatment of 401(k) Plan Contributions: Projected Impact on Participant Account Balances. The result:

A recent proposal to change the tax preferences for employment-based 401(k) retirement plans could result in an average reduction in 401(k) account balances of between 6-22 percent at Social Security normal retirement age for workers currently ages 26-35, according to new research by the nonpartisan Employee Benefit Research Institute (EBRI).

The response — a combination of plan sponsor reaction and participant response — is strongly tied to plan size, with participants in smaller plans likely to experience deeper average reductions in 401(k) balances, according to EBRI’s baseline analysis. For plans with less than $10 million in assets, participant balances at Social Security normal retirement age for workers currently ages 26-35 could decline between 23-40 percent, depending on the size of the plan and income of the participant.

Comprehensive tax reform isn’t going to be easy.

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