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EBRI: Retirement savings incentive change would hurt participants as interest rates rise

A White House proposal to cap the tax incentives available through retirement savings plans will negatively effect more defined contribution participants as interest rates recover from historically low levels, according to an analysis released Monday by the non-partisan Employee Benefit Research Institute.

The administration's fiscal year 2014 budget proposal calls for limiting the amounts accumulated in tax-deferred retirement accounts to mirror the maximum annuity for a tax-qualified defined benefit plan, which is currently $205,000 for a joint-and-survivor benefit at age 62. Based on interest rates at the time of the proposal, that would create a cap of $3.4 million in total account accumulation in defined contribution plans.

In a simulation model of current 401(k) plan participants, EBRI found that more than 10% are likely to hit the proposed cap sometime before age 65, at a current 4% discount rate. A rise in that discount rate “increases substantially” the percentage of workers who would be affected by a cap, with nearly a third likely to be affected if the discount rate rises to 8%, EBRI found.

“While relatively few 401(k) participants would be affected by this at first, the impact would likely spread over time, perhaps substantially, depending on interest rates and whether individuals also participate in a defined benefit retirement plan,” said Jack VanDerhei, research director at EBRI and author of the study, in a news release.