Last week’s Senate Finance Committee hearing on reforming theindividual tax code was heartening for retirement industrystakeholders.

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One proposal reportedly being considered under tax reform is theso-called Rothification of the $7.3 trillion definedcontribution market.

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Eliminating or capping the amount of retirement savingscontributions that can be made on a pre-tax basis would allowlawmakers to book more tax receipts within the 10-year budgetwindow.

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Republicans and Democrats on the committee, as well as policyexperts brought to testify, raised concerns that would come at theexpense of tax revenues outside the 10-year budget window.

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Sen. Orrin Hatch, R-UT, chair of the finance committee, pledgeda bipartisan effort to simplify and reform the code, echoingpromises from the White House.

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Democrats on the committee vowed cooperation, but also insistedreform should not add to deficits.

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On the question of using Rothification to meet that goal, thecommittee expressed broad and bipartisan skepticism.

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Sen. Sherrod Brown, D-OH, a progressive and long-time critic ofWall Street interests, was vehement in his opposition to Rothification,saying it would be akin to “slapping taxes on retirement savings ofworking middle-class families.”

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Sen. Rob Portman, R-OH, who has proposed several pieces ofbipartisan retirement legislation over the past five years, raisedthe question of Rothification’s potential impact on savingsrates.

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The policy experts before the committee cautioned that moreresearch is needed on how mandated Roth contributions would impactsavings habits.

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According to recent data from Cerulli Associates, 20 percent ofplan participants said the tax incentives to deferring savings intotraditional 401(k) plans, which are made on a pre-tax basis, wasthe primary motivator to saving. And nearly half said the tax breakmotivated deferral increases.

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Retirement community remains vigilant

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Melissa Kahn, managing director of retirement policy for thedefined contribution team at State Street Global Advisors, says taxreform stands a greater chance of passing than not.

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“They will have to get something done by the first quarter of2018,” Kahn told BenefitsPRO.

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SSgA is a member of the Spark Institute, which as a member ofthe Save Our Savings Coalition, a lobby comprised of assetmanagers, employer and consumer advocates, and defined contributionplan advisors that is pushing to block Rothification as a way topay for tax reform.

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While last week’s hearing was clearly positive for thestakeholders pushing back against Rothification, Kahn says there iscause to remain vigilant.

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“It was a good hearing in the sense that there was wide supportfor the tax incentives of savings,” said Kahn.

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“Lawmakers are aware of the issue and that is a good sign. Butthings have a way of happening very quickly if deals need to bemade behind closed doors,” said Kahn.

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Moreover, less is known about the intentions of lawmakers in theHouse of Representatives. “We haven’t heard much in the House. I’mconcerned they will still pursue this. Everything is on the tablein the House. The retirement community needs to remain vigilant,”said Kahn.

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Accusations of profit motive are ‘cynical’

State Street manages $421 billion in global DC assets, and is atop 10 manager in the U.S. market.

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In a recent interview, Daniel Hemel, an assistant professor oflaw at the University of Chicago, said profit motive best explainsthe financial services industry’s push back againstRothification—not concern over savings rates.

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“Their incentives seem quite clear,” Hemel told BenefitsPRO.“Asset managers have a strong interest in stopping Rothification.They want assets under management to be higher, and they are higherunder the traditional model.”

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Hemel recently published a blog exploring the management profitson a $100 investment over 20 years.

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In a traditional 401(k) plan at an annual management fee of 1percent, fund managers would earn $35 over two decades. But if thesame $100 is first taxed and then invested in a Roth platform,management fees would be $21 over two decades.

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“Asset managers are making more money under the traditionalmodel,” Hemel said. “That money has to come from somewhere—it’scoming from the government.”

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Kahn says the idea that asset managers are acting out of profitmotive is “cynical.”

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“We don’t know what Rothification would do to our assets undermanagement,” she said. Kahn cites data that shows youngerparticipants would keep savings rates equal under a Roth system,and other older, wealthier participants may actually increasesavings rates to actualize the benefits of Roth withdrawals, wereare tax-free in retirement.

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“Our motto is ‘making retirement work’. We care about makingthings right for participants. Our view is not based on what is inour best interest. The retirement system needs to work, or everyonewill be a loser,” said Kahn.

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Her concern that Rothification would hit lower income savers andsmall businesses with the hardest aligns with much of industry, tosay nothing of Senate Finance Committee members.

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“We need more data on how Roth would impact those segments,” shesaid.

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Whether that evidence comes in time to inform lawmakers remainsa wild card. The Employee Benefits Research Institute is reportedlyputting the last touches on new data exploring Roth’s impact onlower earners’ savings habits.

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Either way, Kahn underscores the reality that the Trumpadministration is insistent that Congress pass some type of taxreform, and quickly.

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“Congress is dealing with a President unlike any other,” saidKahn. “He’s not ideological at all. He wants to make a deal. Ithink Democrats and Republicans are just now waking up tothat.”

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Nick Thornton

Nick Thornton is a financial writer covering retirement and health care issues for BenefitsPRO and ALM Media. He greatly enjoys learning from the vast minds in the legal, academic, advisory and money management communities when covering the retirement space. He's also written on international marketing trends, financial institution risk management, defense and energy issues, the restaurant industry in New York City, surfing, cigars, rum, travel, and fishing. When not writing, he's pushing into some land or water.