Match vs. Defaults

Which is more powerful—a generous match, or a high savings rate default? 

As it turns out, Christmas Eve brought us a new white paper with the fairly innocuous title, “The Impact of Employer Defaults and Match Rates on Retirement Saving.” Indeed, there have been plenty of surveys (and tons of data) that speak to this issue (many of which are cited as references in the paper)—but underneath that bland title the authors take on an intriguing question, specifically how, and how differently, the deployment of specific plan design features—the employer match, or default enrollment—impact retirement savings.

With regard to the former, there’s been plenty of real data to buttress the notion that the employer match acts as a virtual target for retirement savings—with employee contributions clustering around those like moths to a flame, regardless of the savings needs or income wherewithal of the participant. Similarly, we’ve long—but even more so since the advent of the Pension Protection Act of 2006– seen the dynamic impact that default savings rates—making individuals “opt out” rather than sign up—for retirement savings routinely produce participation rates north of 90%. 

Now, these plan designs have long been seen by employers (and those who support them) as positive forces to encourage workers to avail themselves of these critical benefits. On the other hand (and somewhat cynically), both can be seen as devices to produce retirement deferral rates sufficiently high to permit retirement plans to pass the muster of the various nondiscrimination tests to which they are subjected. And let’s face it, both carry costs for the employer(s) sponsoring the program. Indeed, if there is a shortcoming to these mechanisms at all it is that employees have seemed to assume they represent an answer to the “how much should I save” question, rather than simply being a function of how much the employer chooses to spend on benefits.

‘Better’ Idea?

As it turns out, the researchers (David Blanchett of PGIM DC Solutions, Michael Finke of the American College of Financial Services & Empower’s Zhikun Liu) have an answer to the question as to which is “better”—well “better” meaning the plan design that results in the highest employee savings rates, highest acceptance of the default investment, and lowest disparities in savings rates by income—that would be the one that uses a high default rate and a lower employee match.

 More specifically, based on a review of the activities of approximately 157,000 participants[i] who recently enrolled in an employer-matched 401(k) plan, they conclude that “a higher default rate has the largest impact on employee savings rates.”

Not only that, they caution that “plans with low default rates (say 3% or 4%) that match a high percentage of employee earnings induce higher-income participants to actively move away from the low default savings rate, resulting in a wider savings gap between higher- and lower-income employees.” On the other hand, setting a high default means that “fewer move away from the default savings rate resulting in higher and more equal savings rates among employees.” 

Other Considerations

There are some other considerations. They note that low default rates and high match rates also result in significantly fewer employees remaining in the default investment, and that while “raising the default savings level should increase savings rates for new participants, it won’t necessarily help existing participants.” As a consequence, the researchers comment that “plan sponsors may also consider different kinds of reenrollment or plan-reset options to utilize the positive impact of default savings rate increase. Additionally, plan sponsors should also consider including provisions for automatic savings rate increases to further boost participant savings levels”—because the one thing we know about most retirement savers is that—like Newton’s 1st Law of Motion—an object at rest remains at rest. And that’s what happens to most participants defaulted at a specific saving rate and in a specific investment—they stay there.

They also note that a high match appears to motivate workers to make an active decision to save more only when placed in a low initial default rate. Moreover, they found that a higher match motivates higher-income workers to save more, but only motivates lower-income workers who are defaulted (at the aforementioned 3% or 4% savings rate). They found that, when defaulted at a higher savings rate, the match rate only motivates high earners to increase their savings rate.

All in all, the match seems to matter to those who are more actively involved with the decision to join the plan—and those who are defaulted into the plan, in general, don’t seem to be those. There’s also a sense that more highly compensated individuals are more aware of, and active in, maximizing the match—though that may create nondiscrimination testing issues since less highly compensated workers seem to be more inclined to simply stay with the default rate.

Ultimately, of course, what matters is the default rate and the terms of the match; and with any luck at all, it’s not either or, but both!

- Nevin E. Adams, JD

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[i] Not that it matters, but the paper specifically cites “the second largest recordkeeper for retirement plans in the United States, which services over 12.8 million DC plan participants across approximately 67,000 retirement plans as of the third quarter of 2021”—Empower.

4 Retirement Savings Benchmarks That (Generally) Miss the Mark

Behavioral finance tells us that human beings are prone to relying on heuristics – mental shortcuts, if you will – to solve complex problems. While these may not be very accurate, survey data and anecdotal evidence suggest that participants often rely on these benchmarks.

Here are four that workers use more often than we’d perhaps like to admit.

The Company Match

Survey data and academic research have long suggested a link between the employer match and the level to which workers contribute. Indeed, there has been evidence (frequently invoked by advocates of the so-called “stretch” match) that it’s not the amount of the match that motivates, but the existence of the match at any level.

There is, in fact, evidence that a lot of people save only as much as they need to receive the full employer match (unfortunately, there’s also evidence that many don’t take full advantage – particularly lower income workers – and confusion about how much you need to save to get the full match.

There are, of course, a number of factors that go into determining the amount and level of the match; how much individuals need to set aside for their own personal retirement goals is almost certainly not one of those factors.

Saving to the level of the employer match is certainly a good starting point, but unless it’s truly extraordinary – well, it’s likely not “enough.”

The Automatic Enrollment Default

While you see surveys suggesting that a greater variety of default contribution rates is emerging, the most common rate today – as it was prior to its codification in the Pension Protection Act more than a decade ago – remains 3%. There is some interesting history on how that 3% rate originally came to be (it’s been the standard default for such programs going back to when they were still called “negative elections”), but the reality is that it has become that default because it is widely seen as a rate that is small enough that participants won’t be willing to expend the time and energy to opt out (if they even notice the withholding).

Little wonder that in automatic enrollment plans at Vanguard, more than half (55%) are contributing below the match initially, and one in five (21%) is still below that level after three years.

For those who worry that a higher default would trigger a higher rate of opt-outs, surveys indicate that the “stick” rate with a 6% default is largely identical to 3%. And though there are indications that the default savings rate is moving up from the traditional 3%, there is one thing that you’d like to think everyone knows.

Saving at a 3% rate, unless you have alternate financial resources, is definitely not “enough.”

The Pre-tax Cap

At the height of the Rothification “scare” (and make no mistake, we’re not out of those woods yet), there was a sense that existing automatic enrollment programs might be affected. Specifically, that plan sponsors wouldn’t be comfortable simply continuing to auto-enroll above whatever pre-tax cap was established by legislation ($2,400 was the rumored level at that moment) without some independent approval by the participant (setting aside the irony in turning to an automatically enrolled participant for some direction). Moreover, some providers had echoed that sentiment, saying that they would feel obliged to place that cap in the plans they recordkeep with automatic enrollment provisions — at least until plan sponsors told them otherwise. And if plan sponsors aren’t comfortable making that switch with their automatic enrollment programs — well, you can see how that Roth limit could in short order actually become a limit on retirement savings.

But one of the more unique arguments I heard against Rothification at the time was that that a pre-tax cap, whatever it turned out to be, would be viewed by workers as some kind of de facto sign from the government that the amount they would allow you to save on a pre-tax basis would be seen as a proxy for the “right” amount to save for an adequate retirement.

And just about the time you find yourself thinking, “there’s just no way anybody could be that stupid” – the sad reality sinks in.

A Guess

In the 2017 edition of the Retirement Confidence Survey, just 4 in 10 workers (41%) report they and/or their spouse have ever tried to calculate how much money they will need to have saved so that they can live comfortably in retirement (the all-time high was 53% in 2000). Not surprisingly, workers reporting that they or their spouse participate in a retirement plan are significantly more likely than those who do not participate in such a plan to have tried a calculation (49% vs. 15%).

Now, over the quarter-century (and change) of its publication by the nonpartisan Employee Benefit Research Institute, the Retirement Confidence Survey has produced any number of interesting, compelling, and even startling findings. And yet, the one that continues to puzzle me is not the percentage of workers who say that they have ever tried to calculate how much they need to save for a comfortable retirement – but the proportion of those who say that evaluation was based on… a guess. That’s not a finding included in this year’s RCS, but in the past, it was as much as 45%.

Several years back, those individuals were asked how much they need to save each year from now until they retire so they can live comfortably in retirement; one in five put that figure at between 20% and 29%, and nearly one-quarter (23%) cited a target of 30% or more. Those targets are larger than one might expect, and larger than the savings reported by RCS respondents would indicate.

All of which brings to mind the following; were the savings projections so high because so many workers didn’t do a savings needs calculation — or did participants avoid doing a savings needs calculation because they thought the results would be too high?

Or both.

Benchmarks can provide a ready and relevant measure of progress against goals. But if the goal is short of the need, the benchmark may be of little use.

There’s an old saying: “If you don’t know where you’re going, you’ll probably end up somewhere else.” And indeed, for many retirement savers who are relying on unreliable benchmarks, that “somewhere else” could be a pretty unpleasant destination.

- Nevin E. Adams, JD

A Retirement Industry Thanksgiving List

Thanksgiving is a special time of year — and one on which it seems fitting to reflect on all for which we should be thankful. Here’s my 2015 list:

I’m thankful that so many employers voluntarily choose to offer a workplace retirement plan — and that so many workers, given an opportunity to participate, do.

I’m thankful that so many employers choose to match contributions or to make profit-sharing contributions (or both). Without those matching dollars, many workers would likely not participate or contribute at their current levels — and they would surely have far less set aside for retirement.

I’m thankful that the vast majority of workers defaulted into retirement savings programs tend to remain there — and that there are mechanisms (automatic enrollment, contribution acceleration and qualified default investment alternatives) in place to help them save and invest better than they might otherwise.

I’m thankful that trends that suggest that more plan sponsors are extending those mechanisms to their existing workers as well as new hires.

I’m thankful for qualified default investment alternatives that make it easy for participants to create well-diversified and regularly rebalanced investment portfolios — and for the thoughtful and on-going review of those options by prudent plan fiduciaries.

I’m thankful that participants, by and large, continue to hang in there with their commitment to retirement savings, despite lingering economic uncertainty and competing economic interests, such as rising health care costs and college debt.

I’m thankful that the federal government remains willing to postpone taxing pay that Americans postpone taking (and spending) by saving for retirement.

I’m thankful that a growing number of policy makers are willing to admit that the “deferred” nature of 401(k) tax preferences are, in fact, different from the permanent forbearance of other tax “preferences” — even if governmental accountants and certain academics remain oblivious.

I’m thankful that the “plot” to kill the 401(k)… hasn’t. Yet.

I’m thankful that those who regulate our industry continue to seek the input of those in the industry — and that so many, particularly those among our membership, take the time and energy to provide that input. I’m hopeful, particularly in areas like the fiduciary proposal, that the final product will reflect that input.

I’m thankful for objective research that validates the positive impact that committed planning and preparation for retirement makes. I’m thankful for the ability to take to task here research that doesn’t live up to those objective standards.

I’m thankful for the warmth with which readers and members, both old and new, continue to embrace the work we do here. I’m thankful for all of you who have supported — and I hope benefited from — our various conferences, education programs and communications throughout the year. I’m thankful for the constant — and enthusiastic — support of our Firm Partners and advertisers.

I’m thankful for the team here at NAPA (and the American Retirement Association, generally), and for the strength, commitment and diversity of the membership. I’m thankful to be part of a growing organization in an important industry at a critical time. I’m thankful to be able, in some small way, to make a difference.

But most of all, I’m once again thankful for the unconditional love and patience of my family, the camaraderie of dear friends and colleagues, the opportunity to write and share these thoughts — and for the ongoing support and appreciation of readers like you.

Here’s wishing you and yours a very happy Thanksgiving!

- Nevin E. Adams, JD

Are You Exploiting Naïve Myopic Workers With That Employer Match?

Over the years, I’ve seen some convoluted ways to rationalize undermining the tax preferences of workplace retirement plans and substituting government tax credits — but a new one just may take the cake.

“A Behavioral Contract Theory Perspective on Retirement Savings,” authored by Ryan Bubb and Patrick Corrigan from the New York University School of Law and Patrick L. Warren from Clemson University’s John E. Walker Department of Economics, starts off by assuming that workers are rational, though perhaps not rational in the way you or I might consider to be rational. However, I’ll accept as logical their assertion that rational workers will prefer saving through an employer-provided plan, rather than accepting a job that does not provide such a plan.

They also claim to provide an analysis that “provides novel explanations for the use of low default contribution rates in automatic enrollment plans, the shift away from defined benefit annuities toward lump sum distributions in defined contribution plans, and the offering of investment options with excessive fees.” Well, it’s certainly novel. More on that in a minute.

Exploit ‘Actions’

The authors claim that employers that provide qualified retirement plans provide more after-tax compensation (in the form of employer contributions not subject to FICA) to employees than employers that do not, and that if workers are rational (there’s that “rational” reference again), then competition for workers in the labor market should therefore provide incentives for employers to offer such plans. So, all other things being equal, workers would prefer to work for an employer that offers a plan than one that doesn’t. So far, so good.

Now we all know that some workers don’t save, and some don’t save enough. But the paper maintains that “if workers undersave (or make other retirement savings mistakes) due to behavioral biases,” then the labor market will give employers incentives to design plans that “cater to and exploit, rather than resolve, those behavioral biases.”

They claim that some workers undersave due to myopia — and that also results in employer plan designs that “exploit the myopic,” and that they do so specifically by — wait for it — offering matching contributions, which the study’s authors claim “naïve myopic workers overvalue.”

Moreover, they claim that this matching results in what they term “cross-subsidization” of rational workers, which, in turn, lowers myopic workers’ total compensation. Said another way, matching contributions mean that the naïve, myopic part of the workforce is not only undersaving (because they overvalue the contributions), but actually receiving less compensation (since the employer is paying them less to offset the cost of the contributions). Are you following this?

And while you may be under the impression that employers offer matching contributions either to increase NHCEs’ contribution rates or to meet one of the safe harbors so that they can provide greater tax-advantaged compensation to HCEs, according to the researchers, you would be wrong. They claim that employers offer those matches precisely because myopic workers overvalue them. Sound like a devious plot to you? Now you’re getting it…

Not only that, they also claim that matching contributions crowd out what they consider to be the superior — and non-redistributive — “commitment device” of non-elective contributions. That’s right, contributions that do not require any particular action on the part of the worker other than to exist and be eligible. Apparently it’s the reward for specific behaviors that is distorting things.

‘Over’ Matched?

Indeed, these researchers believe that the mere existence of the match means that workers will overestimate how much they will, in fact, save for retirement — and, since they think they will accumulate more than they actually will, they will save less — and employers save money, not only because they pay less (the offset for the matching contributions), the workers will choose to save less — and get less of a match.

Put simply, the paper claims that the labor market gives employers incentives to craft plan designs that cater to what biased workers perceive to be of value, and that the same behavioral biases that produce worker mistakes in saving for retirement will also typically lead workers to prefer plans that fail to correct their mistakes (apparently by encouraging them to save for retirement, but not as much as they need) and that can even exacerbate them. The result, they say, is an equilibrium set of choice architectures (plan design) that fails to effectively address the basic retirement savings policy problem of people not saving enough for retirement. Choice architecture that, in their estimation, is making things worse, not better. Because employers offer workplace retirement plans — and have the temerity to match the contributions of workers who take advantage of these programs. The horror!

Employer ‘Incentives’

The authors’ main message is that when workers undersave due to those behavioral biases, then “employers have incentives to design employer contributions in a way that fails to address the undersaving problem and indeed that can even actively exploit the undersavers.”

They not only claim that matching contributions are harmful to rational workers, but maintain that they are “unambiguously so.” How? Well, they claim that matching contributions distort the worker’s incentive to save by encouraging too much savings (which is apparently different than enough savings), and the worker would receive more “utility” from being paid this money as wages.

Oh, and as another example of employer bad behavior in plan design (and ostensibly another reason employers can’t be relied upon in this role), the authors note that most employers choose an automatic enrollment default deferral rate of 3%. The authors concede that the use of automatic enrollment can result in retirement savings by employees who would otherwise have initially contributed nothing to the plan. However, they caveat this admission by noting that some who would have saved more than that default rate if they had had to fill out an enrollment form only save at the default rate.

The solution for this? Substituting for the current system of employer-provided pension plans a new federal defined contribution plan, designed by a federal agency and not linked to any particular job, of course. Oh, and not only do they claim that this could improve savings outcomes, but that it would do so “at little to no fiscal cost to the government.”

Except, presumably, for the part where the government trades the temporary deferral of tax revenues for the permanent forgiveness of a government tax subsidy.

FWIW, I find it hard to believe that this kind of analysis would survive serious scrutiny outside of the rarefied air of academia. But stranger notions have.

- Nevin E. Adams, JD

3 (More) Pervasive Retirement Myths - an Academic Perspective

Last week I highlighted three “myths” about the retirement system that will not die — all the more distressing because they are perpetuated by retirement industry pundits. Here are three more that (mostly) aren’t perpetuated by those who actually work with retirement plans, but by academics.  Academics who, sadly, are often listened to, and cited by those who regulate and legislate these programs.

The Match Doesn’t Matter

This doubtless comes as a surprise to those of us who work with retirement plans and retirement plan participants. More precisely, there are a few studies out there that suggest that a matching contribution doesn’t have a very strong impact on participation. The study that is cited most often in support of this one is one conducted several years ago in conjunction with H&R Block, where individuals were offered a financial incentive to take their tax refund and deposit it in an IRA. Most didn’t — and thus the notion that the promise of the match doesn’t produce (much) in the way of participation.

Now, if you find yourself saying, “But that’s not really an analogous situation to 401(k) saving” — well, you wouldn’t be the only one to think so.

But even if it has only a modest impact on the decision to participate, the data clearly suggests that it has a big impact on the rate of savings — and on the savings accumulations itself.

You Can Plug the Leakage Problem by Limiting Loans

Preventing “leakage” has become a constant drumbeat of many in our industry, their passion fueled by estimates of the enormity of the problem that seem limited only by the imaginations of those clamoring to solve it. As recently as a week ago, I was at a conference where a respected researcher went so far as to suggest that we are losing as much as $1 in leakage for every $2 contributed into the system. I kid you not.

Now, the “out” for these wild exaggerations is that nobody knows for sure, and so — if you’re looking for them — you see those estimates footnoted with disclaimers like “author’s calculations.” Or sometimes they come right out and admit that it’s based on a “host of simplifying assumptions.”

Don’t get me wrong — “leakage” can be a threat to an individual’s retirement security. But when the nonpartisan Employee Benefit Research Institute (EBRI) looked into the matter in testimony provided to the ERISA Advisory Council last year, it was cashouts — not loans or hardship withdrawals (even including the impact of a six-month suspension of contributions) — that turned out to be approximately two-thirds of the leakage impact.

So, if you want to solve the real leakage problem, you might want to start by accurately assessing the size of the problem, rather than just making numbers up. And then you might look for ways to make it easier for folks to keep their savings in the system at job change.

And let’s not forget — locking people’s money up with no access until retirement may solve the leakage problem. But it could also lead to a reduction in the amount of money people save in the first place.

The 401(k)’s Tax Incentives Are ‘Upside Down’

One of the comments you hear from time to time is that the tax incentives for 401(k)s are “upside down” (or as it has been more colorfully described, “out of whack”) — that is, they go primarily to those at higher income levels, who perhaps don’t need the encouragement to save. And from a pure financial economics perspective, those who pay taxes at higher rates might reasonably be seen as receiving a greater benefit from the deferral of those taxes.

Indeed, if those “upside-down incentives” were the only forces at work, one might reasonably expect to find that the higher the individual’s salary, the higher the overall account balance would be, as a multiple of salary. However, drawing on the actual administrative data from the massive EBRI/ICI 401(k) database, and specifically focusing on workers in their 60s (broken down by tenure and salary), EBRI Research Director Jack VanDerhei has found that those ratios hold relatively steady. In fact, those ratios are relatively flat for salaries between $30,000 and $100,000, before dropping substantially for those with salaries in excess of $100,000.

In other words, while higher-income individuals have higher account balances, those balances are in rough proportion to their incomes. They are not “upside down.” Now this is the outcome — the balances — not just focused on the contributions, the amount(s) going in, which is what most of the criticism focuses on.

As retirement plan advisors are well aware, these programs are subject to a series of limits and nondiscrimination test requirements: the boundaries established by Code Sections 402(g) and 415(c), combined with the ADP and ACP nondiscrimination tests. Those plan constraints were, of course, specifically designed (and refined) over time to maintain a certain parity between highly compensated and non-highly compensated workers in the benefits available from these programs. The data suggest they are having exactly that impact.

More recently, the “fairness” of these incentives has been questioned since they “only” go to workers who are covered by workplace retirement plans (though, as I pointed out last week, those numbers are often distorted as well). A better solution might be to expand those covered by such plans, rather than to undermine the diligence of those who are saving.

You’re less likely to hear these statements in your earshot — they tend to show up in academic forums, and sometimes in legislative hearings — forums where “decorum” might suggest avoiding confrontation.

But this is not just an academic exercise. And no one is well served — even the often well meaning academics who are trying to help improve the current system — by perpetuating misunderstandings.

- Nevin E. Adams, JD

"Retirement Ready" Resolutions

As the New Year begins, we are often of a mind to think about making a fresh start. If you are an individual, you may (finally) be ready to be serious about saving for retirement - or you may have mailed in that last tuition check - or crossed that age 50 threshold where you can start "catching up" on retirement savings. If you're an employer, you may well have established new goals for your retirement plans this year—a new threshold for participation, perhaps—or maybe you’ve just rolled out a new fund menu for your participants.

But whether your plans - or your programs - have undergone change or not, this is a good time of year to help participants reexamine their savings goals—and perhaps even some of their “bad” retirement savings habits.

Here’s a short list of “resolutions” that can help you get started.

___ Resolve to participate in your workplace retirement savings plan.

If you are not already saving for your retirement in your workplace program, you are missing out on one of the most important—and easiest—ways of making sure that you are on track for a financially secure retirement. Unless, of course, you have a rich (old) uncle.

___ Resolve not to miss out on the company match.

Odds are your employer matches your contributions to your retirement savings account up to a certain level, say 5% of 6% of your pay. Whatever that level is, if you do not contribute up to that point, you are letting “free” money slip through your fingers.

___ Resolve to increase your savings rate in your workplace retirement savings plan by at least 1%.

If you are already saving, are you saving enough? Have you ever made an attempt—with some kind of planning tool or the assistance of a financial adviser—to figure out how much you will need? Even if you have, it is remarkably easy to increase your current rate of savings by as little 1%--and you might be surprised just how much difference that will make!

___ Resolve to consider rebalancing investments at least once this year.

Your retirement savings account is being rebalanced all the time—by the investment markets. You can start out the year with half of your account balance in stocks and the rest in bonds, and a month later find that 70% is now in stocks and just 30% in bonds, or the reverse. How much and how fast depends on how your balance is allocated, and what is happening in the market. The bottom line: Once you have taken the time to put together a thoughtful allocation, you need to keep an eye on things. Once a month is good, once a quarter is probably enough, and once a year—well, that’s a minimum. Try picking a day that you won’t forget—your birthday, an anniversary…. Or any three-day weekend.

___ Resolve to use target-date investments properly.

Target-date funds are a pre-mixed investment solution—and most are designed in such a way that they assume that you are investing all of your retirement savings in that one investment. If you mix and match that with other funds on your retirement savings menu—or split your savings between two (or more) target-date funds—you will probably wind up with a mess. Just pick one. It’s the basket you SHOULD put all your eggs into.

What would YOU add to this list?

- Nevin E. Adams, JD

Savings “Bonds”

In my experience, there are three major reasons that people save for retirement. There’s the lure of the “free money” represented by the employer match, the benefit in deferring the payment of taxes, and there’s the hopefully obvious benefit of helping make sure you have enough money set aside to provide a financially satisfying retirement. While one might hope that the last represents the dominant motivation for most, I suspect it’s almost incidental.

Anecdotal evidence would suggest that the match exerts a powerful influence on savings behaviors. Sure, any number of participant surveys emphasize its importance as a factor, but to my eyes, the most compelling evidence is the clustering of participant deferral rates—in plan after plan—at the level at which the employer has deigned to provide that financial incentive.

As for the tax advantages, outside of Warren Buffett, I can count on one hand the number of individuals of my acquaintance who feel they are “under-taxed.” More importantly, I can still remember the first time I had someone explain to me how not forking over a chunk of my hard-earned pay to Uncle Sam now made it possible for me to save more without actually reducing my take home pay. Moreover, how that “extra” savings, through accumulated earnings and the “magic of compounding,” could help my savings grow even more, and even faster.1 It was then—and remains, IMHO—a powerful incentive for individuals to save.


That said, of late, the taxation of these contributions—or perhaps, more accurately, the TIMING of the taxation of these contributions—has been much on the minds of those looking to solve the nation’s debt situation by raising revenue, most notably in the so-called “Gang of Six” proposal’s reported adoption of the National Commission on Fiscal Responsibility and Reform’s notion to cap annual “tax-preferred contributions to [the] lower of $20,000 or 20% of income” for 401(k)-type retirement plans.” This stands in sharp contrast to the current structure, where the limit on the combination of employee and employer contributions is the lesser of a dollar limit of at least $49,000 per year and 100% of an employee’s compensation.

Simplistically, it’s hard to imagine that many workers today are setting aside 20% of pay for retirement. Even someone who is deferring 6% and receiving a very generous dollar-for-dollar match would presumably still be well within the comfort zone of those new limits. The $20,000 cap is, of course, more problematic. Still, I’m sure that those who proposed that cap of $20,000—particularly when the current limit on pre-tax deferrals is $16,500, and the median deferral less than half that sum—think it won’t matter much to “regular” folks. At least they might have thought so, had they not paid mind to a recent analysis by the nonpartisan Employee Benefit Research Institute (EBRI), not just for the highly compensated, but for those who today may not be, but who would hit those limits during their later working years (see Capping Tax-Preferred 401(k) Contributions Would Hurt Workers ).

Indeed, when you examine EBRI’s projections, you begin to appreciate the truly insidious impact those kinds of limits would impose on savings over time—all to satisfy the kind of accounting gimmickry that allows lawmakers to claim they have saved the taxpayer money by generating revenue in the near-term while completely ignoring the long-term collections, and longer-term implications of such a shift in policy.2

A focus that IMHO is, as that old English proverb once cautioned, penny-wise—and pound foolish.

—Nevin E. Adams, JD

1 Of course, in those days, we were also being told that when we withdrew those funds, we’d likely pay taxes at a lower, post-retirement rate—a message that I’m betting has fallen by the wayside in most enrollment meetings these days.

2 For an expanded analysis of the impact, check out “ASPPA Speaks out against Retirement Measures in Budget Proposal”, as well as ASPPA’s report on “Retirement Savings and Tax Expenditure Estimates”