President Obama’s Retirement Saving Surprise

As the contents of President Obama’s 2014 fiscal year budget proposal were revealed, it became evident that it would break new ground with one of its provisions for retirement saving.  Most attention-grabbing was a plan for a per-taxpayer retirement accumulation cap, tied to a projected future benefit.  The motive for this is to generate revenue by limiting tax-advantaged saving.  Put simply, you or I would not be permitted to accumulate combined IRA and employer plan assets greater than an amount which—when applying an actuarial formula—would yield an annual payout at retirement age greater than the maximum that can be paid out from a defined benefit (DB) pension plan.  That limit is $205,000 for 2013.  The amount would be indexed to inflation, as is the maximum annual DB plan benefit. 

There are administrative complexities to this proposal, to be sure, such as determining when a taxpayer’s limit has been reached, the effects of investment gain or loss on contribution eligibility, consequences of breaching the cap with an otherwise-eligible contribution, and more.  But, beyond such details is the larger issue of the philosophy behind it, and the consequences—intended and otherwise—of such a proposal.  

Philosophically, should government be telling taxpayers how great or how limited their assets should be upon entering retirement?  Taxpayer circumstances differ greatly, as do their commitments, responsibilities and aspirations, both during working years and upon actual retirement.  The assets needed to meet these responsibilities and realize these aspirations must naturally differ, too. 

The counter-argument is likely to be that everyone is free to save as much for retirement as they are able to, but may have to do it without the benefit of a tax Code incentive, which tax-preferred retirement saving programs give them.  While this may sound reasonable, the reality seems to be that without tax incentives retirement savings suffer.   For example, many will recall the Taxpayer Relief Act of 1986 (TRA-86) and the restrictions it placed on Traditional IRA deductions.  Those participating in an employer-sponsored retirement plan, or who were married to someone who was,  had to consider their income when determining their eligibility for a deductible IRA contribution. IRA contributions fell by about 50% in one year starting with the first year tax incentives were not available.  This seems to be pretty clear and convincing evidence that tax incentives do matter.

While the TRA-86 changes resulted in less savings, at least the changes were prospective ones  that did not penalize taxpayers for past saving behavior.  The president’s proposal can be viewed as penalizing past behavior, in effect asking many who have saved diligently and invested well to recalibrate the vision they have for retirement.  While others who are similar in age, income, profession, or some other parameter can continue to save the maximum amounts permitted under the Internal Revenue Code, those with larger accumulations will be required to stop saving in a tax-advantaged manner.  The rules will have been changed in the “middle of the game” for many who have played the game fairly and well. 

There is also the matter of employer incentives for maintaining retirement plans, which benefit many thousands of rank-and-file workers who may never accumulate enough to be affected by the proposed cap.  When an employer reaches the maximum accumulation and must restrict future contributions, will he or she continue to sponsor a plan that only benefits the rest of the workforce?  And what about the loss of capital formation, which is the outcome of saving of all kinds?  While the largest share of U.S. retirement assets are now in capital-rich IRAs, the lion’s share did not originate as IRA contributions, but as contributions to employer-sponsored plans, whose balances were ultimately rolled over to IRAs.  The employer-sponsored plan is the goose that has laid many golden eggs.

It is unlikely that President Obama’s complete budget proposal will be accepted as-is, or will progress to legislation and become law in current form.  The Republican-led House and Democrat-led Senate have adopted their own budgets, neither of which matches the one proposed by President Obama.  Following hearings on the president’s budget by each body, compromise is inevitable if any budget resolution is to be adopted; there may not even be a consensus budget achieved this year. 

Nonetheless, laws begin life as proposals, and “parts” from multiple sources can become assembled into a legislative whole sometimes unrecognizable in its origins.  Not entirely unlike sausage making, as the saying goes.  Now is the time to make sure that the budget ingredients are not harmful to the mission of encouraging retirement saving.  Harmful, as we believe this particular ingredient to be.   

What Can We Expect From DOL’s “New Sheriff in Town?”

Whenever there is a change in the senior leadership of any organization, there is a period of uncertainty.  This is true in both the private and public sectors.  At such times it can be unclear whether the status quo will be maintained, or if major change in direction will occur.  President Obama’s recent nomination of Thomas Perez to succeed the departing Hilda Solis as Secretary of the Department of Labor (DOL) leaves my headline question unanswered for the moment.   

First, of course, comes Mr. Perez’ confirmation, and it is already clear that some Senators have a some concerns with him.  Perez currently serves as Assistant Attorney General for the U.S. Justice Department’s Civil Rights Division.  Among his critics, long-time Iowa Republican Senator Charles Grassley has threatened to oppose Perez’ nomination over allegations that he used his department’s influence to keep a potentially important housing discrimination case from going to the U.S. Supreme Court.  Others have expressed the opinion that he has leaned toward lax enforcement of immigration rules.  It remains to be seen how the nomination will proceed through Congress.

But what is of most immediate interest to the retirement industry is the direction that DOL may take on employee benefits in 2013 through 2016, during the remainder of President Obama’s second term.  Perez’ predecessor Solis’ pre-DOL experience included four terms as a California congresswoman, and featured a focus on labor issues.  Perez’ record of public service has had a focus weighted more heavily towards immigration and civil rights issues. 

This does not mean that he doesn’t or cannot grasp labor issues, but they do not appear to be his forte.  If this is an accurate assessment, then it would not be a huge surprise if Perez vision in a DOL leadership role—again, if confirmed—might logically be influenced by 2^nd term holdover Phyllis Borzi, Assistant Secretary for the DOL’s Employee Benefits Security Administration (EBSA).  I think it if fair to say that Borzi is considered to be among the more aggressive of recent EBSA leaders in advancing an agenda that places greater compliance demands on retirement plan sponsors and industry service providers.  For example, she is believed to be an advocate for a fairly broad definition of “fiduciary,” including applying these rules to the IRA environment, something that is an item of concern for many in the financial industry and on Capitol Hill.

It is not the case that retirement industry players are anti-compliance.  But there are fears that some of the directions EBSA might take would add compliance complexity and cost, without significant benefits to retirement plan participants—or IRA savers for that matter.  If Perez is confirmed, it is hoped that he will become familiar with the turf on both sides of the compliance fence, and will not adopt an adversarial and litigious attitude in the mistaken belief that this is in the best interest of U.S. workers and retirement savers.