One idea gaining ground as the Trump administration ramps up its tax policy pitch is a major push to a Roth-style 401(k). While the possibility of some sort of 401(k) reform has fed the anxiety of advisors and watchers since the president’s election, Politico reports that the Roth framework is “quietly being discussed.”
It’s an idea that the publication notes would raise billions of dollars in the short-term and is pulled from a 2014 plan put forth by House Ways and Means Committee chairman David Camp, which tax negotiators are currently (and carefully) analyzing.
However, it’s “unpopular with budget hawks, who consider it a gimmick; the financial services industry that handles retirement savings; and nonprofits that try to encourage Americans to save.”
The discussion draft of the Camp plan includes a number of workplace retirement plan provisions, according to Terry Dunne, senior vice president and managing director of Retirement Services at Millennium Trust Company. They involve eliminating income limits on contributions to Roth IRAs, terminating new SEP and SIMPLE plans, and modifying rules regarding qualified plan distributions—yet the majority are unlikely to make in the final proposal.
In all, the provisions were projected to generate about $228 billion in new tax revenue from 2014 through 2023. However, just three changes accounted for most, Dunne writes:
- 50/50 contributions: Companies with 100 or more employees that offered 401(k), 403(b), and 457 plans would be required to offer Roth accounts. One-half of allowable annual elective contributions could be made to traditional accounts, and the remainder would go into Roth accounts. The change was projected to generate $144 billion in revenue.
- Freeze COLA: Inflation adjustments for regular and catch-up contributions to SEPs, SIMPLE IRAs, and defined contribution plans (including 401(k), 403(b), and 457 plans) would be suspended until 2024. The change was projected to generate $63 billion in revenue.
- Eliminate Traditional IRAs: “New contributions to Traditional IRAs and non-deductible Traditional IRAs would be prohibited.” The change was projected to generate $15 billion in revenue.
“With the industry heavily focused on 401k retirement outcomes, some professionals worry that shifting from traditional contributions to Roth contributions would have a negative effect,” Dunne adds.
The Employee Benefit Research Institute (EBRI)’s 2011 Retirement Confidence Survey supports those concerns. The vast majority of survey participants—across income groups—indicated that current tax deductibility was an important factor in their savings decisions, it found.
“EBRI studies have documented that defined contribution plans (and the IRA rollovers they produce) are the component of retirement security that appears to be generating the most non-Social Security retirement wealth for Baby Boomers and Gen Xers,” EBRI research director Jack VanDerhei said in testimony before the committee.
He added the potential increase “of at-risk percentages resulting from employer modifications to existing plans and a substantial portion of low-income households decreasing or eliminating future contributions to savings plans as a reaction to the exclusion of employee contributions for retirement savings plans from taxable income, needs to be analyzed carefully when considering the overall impact of such proposals.”
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
