Are 401(k)’s Headed Towards the Cliff?

Are 401(k)’s Headed Towards the Cliff?

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Cliffs_of_Dover-Michael Rowe wiki

The political classes are talking about 401(k) savings plans. This should make one nervous, because the buzz is not about getting people to save more. The federal government, addicted to its big-spending ways, needs new sources of revenue. The tax deferral feature of 401(k) plans is a potential target, and there is increasing chatter about capping eligible contributions.

Brett Goldstein, director of retirement planning for American Investment Planners, discussed the “20-20 cap” plan in an interview with AdvisorOne :

Employees would be able to contribute the lesser of $20,000 or 20% of their pay. An employee earning $50,000, for example, could contribute as much as $10,000–inclusive of the company match, which Goldstein says is typically 4%, or $2,000.

That means this employee could contribute just $8,000, or 54% less than the $17,500 that current law allows.

Owners of small businesses, who generally have more income than their employees, would be hit harder by caps. This disincentive might tempt them to shut down their 401(k) plans altogether. They could turn to a combination of IRA’s and annuities to accomplish their savings goals, while saving on plan administrative costs. The net result would likely be less savings by employers and employees, fewer choices and more confusion across the board.

One would be hard pressed to argue, after examining the stretched finances of American households and their meager preparation for retirement, that excess saving is the number one problem facing the American economy. But Washington DC is hungry for cash, and that does not bode well for prudent policy choices.

Caveat lector!