With the November election in the rearview mirror, it’s a good time to scan the retirement landscape. What can plan sponsors and plan participants expect on the regulatory and legislative fronts in the coming year? While I don’t claim to have a crystal ball, there are some likely developments on the near-term retirement horizon.
Tax reform
In the wake of the election, the federal government is considering a possible tax increase to reduce the federal budget deficit. Full-scale tax reform could cut or limit specific tax breaks as a way of lowering overall tax rates.
Government sees its top three tax expenditures as:
- Employer-provided health care.
- Retirement plan and IRA exemptions.
- Mortgage interest exemptions.
Several ideas have been proposed to curb the current deductions for plan sponsor and plan participant contributions, including:
- Limiting pretax elective deferrals — scheduled to be $17,500 for 401(k) plans in 2013.
- Capping the compensation limit for pretax contributions.
- Eliminating catch-up contributions.
- Setting an overall cap on itemized deductions.
- Removing the employer tax deduction.
The arguments against reducing retirement savings incentives are twofold. First, the amount of “lost” government revenue from these deductions — an estimated $105 billion for defined contribution (DC) and defined benefit (DB) plans — isn’t actually lost because the money is taxed when distributed. Second, eliminating or reducing current incentives for retirement savings may result in employers terminating plans. That will greatly reduce overall retirement savings levels because workplace plans are the primary retirement savings mechanism in the US.
Brian Graff, executive director and chief executive officer of the American Society of Pension Professionals and Actuaries, voices concern about tinkering with tax incentives. “We understand Congress needs to reduce the debt and raise revenue, but raiding the tax incentives for 401(k) plans will put American workers’ retirement security at risk. Tens of millions of Americans participate in these retirement plans, and 80% of them earn less than $100,000 per year. This is a battle that American workers simply can’t afford to lose.”1
One possible compromise is a greater emphasis on Roth-type retirement plans that tax at the time of contribution — the government gets more tax revenue up front, but there’s still incentive for people to save for retirement.
Regulations
The re-election of President Obama has retirement industry experts preparing for further action on the regulatory front. According to Lynn Dudley, senior vice president of the American Benefits Council, it’s likely that agencies in general will have freer rein with regulations because it’s the president’s second administration. As a result, regulation may be more sweeping than during the past four years.2
Here’s a brief look at some of the potential developments on the regulatory front.
Lifetime income and monthly statements. Plan executives and service providers are closely watching how DOL and Treasury Department officials address ways to get participants to focus on lifetime income needs. Discussions in the industry — and the proposed Lifetime Income Disclosure Act — are focusing on requiring participant statements to show not only the personal retirement savings balance, but also the estimated monthly payment participants could expect to receive after retirement, based on their current account balance. It’s unclear at this point whether the DOL will mandate income projections on participant statements in proposed guidance, which is expected very shortly.
Fee disclosure. It’s too soon to determine if fee disclosures for both plan sponsors and participants have had much effect because they just became effective in 2012. While there hasn’t been much push back from plan participants this year, 2013 could be different as employees become more aware of the fees they’re paying for their retirement plans. The DOL is believed to be ramping up its enforcement capabilities to make sure companies are doing what they’re supposed to do regarding fee disclosure, and that may mean more audits. The DOL issued Field Assistance Bulletin (FAB) 2012-02 to supplement fee disclosure regulations for participant-level disclosures.
Other rules. Finalized rules governing target date funds and qualified default investment alternatives could arrive in 2013. Some experts also expect proposed Internal Revenue Service (IRS) regulations concerning longevity/annuity contracts to be finalized next year. In addition, the IRS could issue some guidance to help plan participants understand their rights and obligations when they leave a job and take their retirement funds with them. We’ll likely see an increased enforcement climate from the IRS, as well as from the DOL. Plan sponsors who don’t self-audit and correct their plans before the IRS gets involved will face stiff penalties.
Legislation
Here’s a look at some proposals for 2013.
USA retirement funds. We may hear more about a different approach to retirement plans offered by Sen. Tom Harkin (D-IA), chairman of the Senate Committee on Health, Education, Labor and Pensions. Sen. Harkin’s concept is a two-pronged effort. The first part of his proposal would create the Universal, Secure and Adaptable (USA) Retirement Funds, a private pension plan to which workers will have universal access. The USA Retirement Funds, which would be privately run and professionally managed, would function as a supplement to DC plans and aren’t intended to replace existing pensions. Each USA Retirement Fund would be overseen by a board of trustees consisting of qualified employees, retirees and employer representatives.
Sen. Harkin’s proposal includes these features for USA Retirement Funds:
- Portability.
- Access to the funds for employees through their employers’ existing payroll withholding system.
- A monthly lifetime income benefit based on the amount of contributions made by or on the behalf of the participant, plus investment performance over time.
Employers’ only obligations would be enrolling workers automatically, ensuring processing of employee contributions and making modest contributions. Low-wage workers would be eligible for refundable retirement savings credits that can be contributed to a USA Retirement Fund.
The second part of Sen. Harkin’s proposal would strengthen Social Security through a series of measures, including:
- Phasing out the cap on wages subject to the payroll tax over 10 years.
- Adjusting the way Social Security payments are calculated.
- Changing the cost of living adjustment.3
It’s my understanding that this concept is being pushed hard on Capitol Hill and will be discussed at congressional hearings next year.
Retirement Plan Simplification and Enhancement Act. Other retirement-related legislation we may see shortly is from Rep. Richard Neal (D-MA), who released a summary this year of his upcoming 2013 bill, the Retirement Plan Simplification and Enhancement Act. Rep. Neal’s bill includes measures to:
- Expand coverage and increase retirement savings.
- Promote preservation of income.
- Simplify and clarify qualified retirement plan rules.
Social Security. Social Security remains a controversial target for trimming costs. Democrats are generally reluctant to delay benefits by increasing retirement age or reduce benefits by modifying cost-of-living adjustments. It’s possible, though, Democrats would agree to compromise legislation that gradually phases in these types of changes in a package deal to raise revenue by cutting deductions or exemptions.
Democrats historically believe that Social Security taxes should be progressive and applied to a higher amount of compensation to improve the solvency of the system. A bill repealing limits on applying employment taxes on wages in excess of the Social Security taxable wage base would generally garner Democratic support, especially if it mandated applying the tax to earnings up to the taxable wage base ($113,700 in 2013) and then to earnings beyond a higher level, such as $250,000.
It’s unlikely a measure supporting the Republican preference for personal savings accounts will be on the congressional landscape in 2013.
Stay tuned
Many vitally important issues affecting spending, taxes and retirement are currently under discussion in Washington, D.C. I’ll keep you posted as key tax deductions and incentives for retirement savings are targeted for review, as well as on other developments relating to retirement savings in 2013.
1 Fiduciary News, “Will fiscal cliff deal harm 401(k) investors?” Christopher Carosa, Nov. 27, 2012
2 PlanSponsor, “The fight for retirement plan tax advantages,” Rebecca Moore, Nov. 16, 2012
3 Source: Investment News, “Sen. Harkin proposes retirement plan revamp, Social Security fix,” Darla Mercado, July 27, 2012
Invesco does not provide tax advice. The tax information contained herein is general and is not exhaustive by nature. It was not intended or written to be used, and it cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed on the taxpayer under US federal tax laws. Federal and state tax laws are complex and constantly changing. Investors should always consult their own legal or tax professional for information concerning their individual situation.
The opinions in this piece are those of the author and are not necessarily those of Invesco. Information in this report does not pertain to any Invesco product and is not a solicitation for any product.
Invesco Distributors, Inc.
© Invesco
