A Vision of Retirement Under the 20/20 Proposal

May 08, 2012

Would the government want to encourage workers to save LESS?  A recent proposal by the deficit reduction committee calls for a reduction to the total combined annual limitations for both the employer and employee to retirement savings plans.  Called the 20/20 Cap Proposal, the committee suggested a cap of the lesser of 20% of an employee’s compensation or $20,000 in annual total employer and employee retirement plan contributions.  Although this sounds higher than the current 2012 deferral limit of $17,000 that employees are restricted to now, the 20/20 Cap Proposal will also include employer contributions that now has a $50,000 or 100% of income limitation for 2012.  This combined limit of only $20,000 will severely limit the tax benefits of business owners to sponsor a retirement plan. According to the American Benefits Council, “ When a typical small business owner evaluates the significant legal responsibilities, risks, and costs of voluntarily sponsoring a retirement plan, it is often the promise of meaningful tax benefits for key employees that is the deciding factor in choosing to establish and maintain a retirement plan. But if tax benefits to decision-makers are substantially diminished, businesses that would have considered plan sponsorship may no longer do so, and existing plan sponsors might reduce employer matching contributions or stop offering retirement plans altogether. All employees would suffer because employer sponsorship offers considerable advantages for workers, including strict fiduciary standards; participation rules that ensure that benefits are delivered across all income groups; easy payroll reduction; lower fees from group participation; access to financial education; and often significant employer contributions.”

The Employee Benefit Research Institute (EBRI) studied the potential impact of the 20/20 Cap with an assumed start date of 2012 to determine any potential reductions in 401(k) balances that could occur due to the $20,000 limitation.  Not surprisingly, the highest income quartile would experience the largest percentage reduction with a maximum reduction seen in the age 36-45 group.  Of course, this is where I fall in the age spectrum as a Gen Xer.  Earlier EBRI research found that about half of those in my age group, born between 1965 and 1974, were already at risk of running short of money in retirement, so an assumed 15% reduction in account balances for this group does not offer much hope for a positive outcome if the 20/20 Cap Proposal is passed.  You can read more about the EBRI study here:  http://www.ebri.org/pdf/notespdf/EBRI_Notes_07_July-11.TaxCao-UnionHI.pdf.

Although the 20/20 Cap is still just a proposal, employees need to be aware that their efforts to save for their retirement nest eggs could be limited in the future and of the importance of taking advantage of contributing to their 401(k) plans and IRAs now, while these accounts still offer a great tax incentive with generous contribution limits.  Don’t let hindsight be 20/20. Share the vision now with your workforce about the importance of saving for retirement by hosting a retirement preparedness workshop or 1 x 1 employee financial planning sessions.