Proposed tax reform for 401(k)-type retirement plans would causethe greatest reduction in retirement savings for both the highest-and lowest-income workers, according to new analysis from theEmployee Benefit ResearchInstitute.

EBRI finds the National Commission on Fiscal Responsibility andReform's recommendation to cap the annual tax preferredcontributions to (the) lower of $20,000 or 20 percent of income”for 401(k)-type plans (known as the “20/20 cap) starting in 2012would most affect the highest-income workers—not surprising, sincethose with high income tend to save the most in these kinds ofretirement plans. However, EBRI also found the cap would cause abig reduction in retirement savings by the lowest-income workers aswell.

The analysis finds that for each age group (except for theoldest), the lowest-income group has the second-highest averagepercentage reductions in 401(k) contributions. Primarily, this isbecause their current or expected future contributions would exceed20 percent of compensation when combined with employercontributions.

“Phrased another way, the 20/20 cap would, as expected, mostaffect the highest-income workers, but it also would cause a verybig reduction in retirement accumulations for the lowest-incomeworkers,” said Jack VanDerhei, EBRI research director.

Currently, the combination of both worker and employer 401(k)contributions is the lesser of a dollar limit of at least $49,000per year, or 100 percent of an employee’s compensation.

The results are from EBRI’s Retirement Security Project Model(TM) and are published in the July 2011 EBRI Notes, “CappingTax-Preferred Retirement Contributions: Preliminary Evidence of theImpact of the National Commission on Fiscal Responsibility andReform Recommendations,” available online at www.ebri.org. The analysis breaks downresults by age group and by relative income group.