Higher rates to have big impact on proposed cap

President Obama’s proposed retirement cap will affect many more retirees than previously thought if interest rates rise to their historic higher levels, according to an analysis by the Employee Benefits Research Institute.

As many as one in 10 workers would find their savings limited by the cap, even at the current, albeit historically low, discount rate of 4 percent, the EBRI said. When its simulation was rerun with higher discount-rate assumptions, the percentage of 401(k) participants with no defined benefit accruals and no job turnover likely to be affected by the cap increases substantially, the organization said.

For 401(k) participants assumed to have a 2 percent, three-year, final-average defined benefit plan with a subsidized early retirement at 62, nearly a third are assumed to be affected by the proposed limit, at an 8 percent discount rate.

The president’s proposal would limit workers from accruing more than $3.4 million in tax-deferred retirement accounts. That would translate to an annuity paying $205,000 per year.

The EBRI simulated the affect of the cap under various interest rates. The cap, designed to raise revenue for the government, was part of Obama’s budget plan.

“While relatively few 401(k) participants would be affected by this at first, the impact would likely spread over time, perhaps substantially, depending on interest rates and whether individuals also participate in a defined benefit retirement plan,” Jack VanDerhei, research director at EBRI and author of the study, said in a statement. 

An analysis in April by EBRI found that less than 1 percent of about 20 million retirement accounts reached the $3.4 million threshold. The EBRI cautioned then that rising interest rates would raise the number of accounts hitting the cap.

When Obama unveiled the proposed cap in April, some critics said the plan would hurt small businesses.

Brian Graff, executive director and CEO of the American Society of Pension Professionals & Actuaries, said in a statement at the time that he was concerned about the impact of those who have saved that much in their 401(k) plans and “will have to pull out and pay tax on any balance over that amount.”

"Without any further incentive to keep the plan, many small-business owners will now either shut down the plan or reduce contributions for workers,” the statement said. “This means that small-business employees will now lose out not only on the opportunity to save at work, but also on contributions the owner would have made on the employee’s behalf to pass nondiscrimination rules.”

Others noted that a higher percentage of younger workers were likely to reach the cap. Neil Smith, executive vice president of strategic business and support services at Ascensus, a retirement plan solutions provider, told BefitsPro.com in an April interview the cap would discourage younger workers from saving because they were likely to reach it at a younger age.

Congress may vote on the 2014 budget sometime after its summer recess, although a showdown with the administration is expected over health care reforms.  

 

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