As the post-election dust settles, the biggest question among retirement industry insiders is what does it all mean and how are changes in Congress and the White House going to affect how people save for their futures?
“My biggest concern as an industry professional is what may or may not come about with tax reform,” said Jason Grantz, institutional retirement consultant for Unified Trust Company, headquartered in Lexington, Ky.
Tax reform has been a bipartisan issue. “I don’t think it mattered if Obama or Romney was elected. In general, there’s a fiscal cliff we’re all worrying about, and we have a spiraling deficit within the United States and one of the things Congress is taking a hard look at is 401(k) plans and the tax advantages afforded there,” Grantz said.
In December 2010, the National Commission on Fiscal Responsibility and Reform recommended to the Obama administration and Congress that they reduce the benefits afforded to 401(k) plans, specifically placing a cap on how much money a person can set aside in their retirement plan each year, including employee deferrals and employer contributions. The proposed cap was the greater of $20,000 or 20 percent of compensation.
“That’s a pretty drastic cut,” Grantz said. “A person who earns $50,000 a year would be capped at $10,000 for all sources. That kind of cut could impact the wealthy but also the middle class and working class Americans who rely on their 401(k) plans as their primary source of savings. That’s my biggest worry in terms of what Congress and government could do to retirement plans.”
Chad Parks, president and CEO of The Online 401(k), said that the election results could be viewed as good and bad. He believes that Gov. Mitt Romney would have been more business friendly and the Democratic-controlled Senate and White House are more socialistic in nature, but the Obama administration has expressed interest in a payroll-deducted IRA mandate and “from that standpoint, I’m happy we have that kind of thought going on in the administration,” he said. “Like it or not, mandate or not, retirement savings is critical to the future of our country. Put politics aside. Look at the issue. Requiring people to save for retirement is not a bad thing.”
Parks also said he believes the President could make some changes in who is running various departments, like the U.S. Department of Labor and the Treasury Department. The DOL has issued and reissued numerous regulations that concern the retirement industry and he wonders if President Obama is happy with how things transpired during the past four years.
One benefit to Obama remaining in office is that “we don’t have to start over with all these departments and all these policymakers. We know who our friends are. We know who is a champion of retirement issues, where they stand and we know the obstacles,” Parks said. “If we had a complete change of administration, we would have to start from scratch. From that standpoint, I believe we can make more progress in the next four years than spend a year or two getting to know everyone again. We can keep up the good momentum.”
Another big concern going into a new administration is that there will continue to be a stalemate on the biggest issues affecting the country.
“It’s pretty much status quo. The real question is what changes? How will the players change their behavior and that is an unknown. For retirement plans it is all about tax reform and whether they’ll nick us or not,” said Ed Ferrigno, vice president of Washington affairs for the Plan Sponsor Council of America.
He added that he believes that tax reform will probably take the form of an overall cap based on income and the phasing out of various tax deductions.
Ferrigno said he also expects a lot of proposed provisions on how to change the employer-provided retirement system, including mandated employer-provided IRAs or George Bush’s idea for a super 401(k) plan that all salaried individuals could defer money into.
The current administration has been fighting for auto IRAs, he said. “I feel they will fight for them in tax reform.”
Both sides of the political spectrum say they want to tackle tax reform, but Ferrigno questions whether they have the stamina to really do it.
“Tax reform is hard. Raising taxes is hard. Taking away cherished deductions is hard. It is not popular. It is hard to do,” he said.
Unfortunately, he said, you can’t have tax reform without entitlement reform or spending cuts and if you “put those three together it is a pretty tough mix.”
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