Don't fiddle with our 401(k)s

The Savings Game

I wrote letters to my congressional representatives this month, and I hope you will too after reading this column. I wrote to implore them not to fiddle with how 401(k) contributions are taxed.

I was inspired to write my representative and senators by reports that Congress was looking at ways to reduce the tax benefits of existing defined-contribution plans. President Donald Trump’s tax plan has the goal of reducing personal and corporate tax rates, which, if enacted, will greatly reduce federal revenue.

According to the congressional Joint Committee on Taxation, recouping the costs of the tax deferral benefits of 401(k) plans could do a lot to fill in that hole.

Some observers in the retirement benefits field suggested that the Trump administration and members of Congress were considering just that — rescinding the tax deductibility of 401(k) contributions and compensate by making distributions tax free, much like a Roth IRA account. Other possible proposals were said to include reducing the amounts plan participants can contribute with a tax benefit.

When questioned directly as to whether such reforms were in the works, administration officials at first gave contradictory responses before stating definitively that they were off the table.

That is no reason to be assured that messing with 401(k)s is off the table — which is why I recommend that you write your representatives and senators.

Here’s why it matters.

When I entered the workforce many years ago, it was not unusual for major corporations to offer a defined-benefit pension. Later, other options for employees to save for retirement through defined-contribution plans such as 401(k) plans became available as well.

Unfortunately, only 13 percent of non-government employees have both a defined-benefit plan and a defined-contribution plan. For those without this advantage, it is very difficult to accumulate sufficient retirement income.

For employees without a defined-benefit pension, a 401(k) plan, together with Social Security, helps provide a modest income in retirement. But it is very difficult now for most workers to retire with sufficient retirement income.

Many but by no means all private-sector employers offer 401(k) plans. Some employers offer to match employee’s contributions up to a limit. An employer might match half an employee’s contribution of up to 6 percent of their gross income (in other words, contribute 3 percent of an employee’s salary to his or her retirement account).

As I have argued repeatedly in this space, you should, if you can, make the maximum contribution in order to receive the maximum employer match. Your contributions (which are capped at $18,000) are tax-deductible, but when you withdraw funds (both principal and gains), you have to pay ordinary income taxes on the amount withdrawn.

Making 401(k) contributions taxable would reduce the benefit significantly for many retirement savers, and it’s possible this would reduce the incentive to save — which is not a sane policy goal.

It’s interesting to note that members of Congress have their own defined-contribution plan, a much better one than the traditional 401(k) plan the rest of us have if we’re lucky.

For example, the federal government matches 100 percent of a congressman’s or senator’s contribution up to 5 percent. Fewer than 10 percent of non-government employees have an equivalent match. In addition, the fees members of Congress pay are much lower than the fees paid by the vast majority of existing 401(k) plan participants. The expense ratio for the congressional plan is 0.039 percent; for many 401(k) plans that expense is more than 1 percent.

In summary, if members of Congress go looking for options to reduce benefits of non-government defined-contribution plans, we expect them to reduce the benefits of their own plans.

Better yet, they should know that the rest of us struggle to use existing retirement plans to generate sufficient retirement income, and it’s not easy for most. If Congress wants to avoid making the retirement savings crisis worse than it already is, it needs to say no to any attempt to reduce incentives to save such as taxing 401(k) contributions.

Elliot Raphaelson welcomes questions and comments at


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