Tuesday, April 16, 2013

Save My 401(k) - Part 2, Retirement Plan Limits under Attack!!!

This is a continuation of some thoughts from last fall where there were proposals kicking around Washington D.C. surrounding Tax Reform and specific threats to the Retirement Plan system.  Back then we thought we might see the dreadful 20/20 rule where individuals would be capped on the amount of contribution benefit to the greater of $20,000 or 20% of compensation per year.  That proposal would have hurt savings across the board.  Because of that ASPPA created a grass roots campaign called Save My 401(k) which many of us practitioners gladly got behind.  Here's the website for information on how to support it.


Flash forward 6 months and Obama's new budget proposal does come with a bunch of cuts directly impacting the Retirement Plan System.  The biggest one is the lifetime cap of $3m.  That seems like a lot of money to the average Joe.  Here are some thoughts:

1.) The number is actually determined as an annual living benefit of $205k/year.  They use that to back into this arbitrary $3m number.  That calculation is levered by prevailing interest rates which are at an all time low.  Therefore, when (not if) interest rates go up, that $3m number will go down and will go down sharply!

2.) The impact on this cap will predominantly be felt by the people in charge of companies.  Those who decide on whether or not to have a plan to begin with.  If they hit the cap, a huge incentive for them goes away and voila, the plan goes away too.  That is felt by every day people, not just the wealthy!

3.) The rule does NOT impact Deferred Compensation plans, aka Executive Bonus Plans.  Why not?  Interesting question.  The big CEO's, President's of Industry, the President of the U.S. ALL have accounts greater than $3m that aren't impacted by the rule.....it is very curious.

Brian Graff, President of ASPPA does a really good job of pointing this out on CNBC.  Link to the video here.  Enjoy!


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