Misguided search for revenue
Skip to main content
pilogo-NEW
Subscribe
  • Subscribe
  • My Account
  • login
  • NEWS
    • Asset owners and the coronavirus
    • Alternatives
    • Consultants
    • Coronavirus
    • Defined Contribution
    • ESG
    • Frontlines
    • Hedge Funds
    • Investing / Portfolio Strategies
    • Money Management
    • Pension Funds
    • People Moves
    • Private Equity
    • Real Estate
    • Searches & Hires News
    • SECURE Act
    • Special Reports
    • WorldPensionSummit
    • Ron Schmitz
      Pandemic drives faster transition for Virginia to private markets
      Mubadala Investment Co. logo
      Mubadala draws on portfolio in coronavirus fight
      T.J. Carlson
      Texas Muni reduces downside risk during pandemic, finding opportunities now
      Scott Davis
      ‘Triage plan’ at Indiana system helped stem losses
    • Non-profit questions dividend recapitalization play at Ares portfolio company
      Walker & Dunlop appoints managing director
      Digital Alpha raises more than $1 billion for infrastructure fund
      John Haggerty
      Sector’s risks need to be weighed, consultant says
    • Philip Pearson
      Hymans Robertson chooses head of LGPS investment
      Daniel Celeghin
      Indefi hires New York-based managing partner
      Hub International continues buying spree with IBG acquisition
      Callan brings on 2 executives
    • American flags outside the New York Stock Exchange
      Stock shorts collapse as no hedge fund wants ‘head ripped off’
      Michelle Dunstan
      Move to link exec pay to ESG integration growing
      The J.P. Morgan Chase logo displayed at a branch bank
      J.P. Morgan sells $13 billion of bonds in largest-ever bank deal
      John Bakarat
      Commentary: COVID-19 and real estate debt – where investors should be looking
    • Pentegra joins with EPIC to offer 3(16) fiduciary services
      Interest rises in keeping retiree assets in-plan
      Joseph Healy
      Smaller DC plans place greater focus on improving financial wellness efforts
      Pentegra launches pooled employer plan
    • Pension funds hear from beneficiaries on ESG – report
      Ivanhoe Cambridge sets 2040 net-zero carbon goal
      Church Commissioners set 25% emissions reduction target by 2025
      U.S. likely to join Europe in mandating climate risk disclosure – John Kerry
    • Riscura stories
      Dystopian tales explore altered retirement reality
      Joel Holsinger
      Ares wants to do good – and profit – with fund
      Girls Who Invest
      MetLife plans 3 internships for Girls Who Invest scholars
      Model home
      Resmark sees niche in buying, leasing model homes
    • Karen Karniol-Tambour
      Bridgewater appoints 2 co-CIOs to oversee new sustainable investing group
      Hedge funds post best first-quarter return since 2000
      Jason Kephart
      Managers see good times ahead in 2021
      Jev Mehmet, CEO of Brevan Howard's Coremont unit
      Brevan Howard runs $50 billion unit like BlackRock’s Aladdin
    • Chinese stock risk up in first quarter, U.K. risk down – Qontigo research
      First Eagle starts small-cap equity team with liftout from Royce
      Sacramento County Employees rebalances equity, fixed-income portfolios
    • First Eagle starts small-cap equity team with liftout from Royce
       Kaitlin M. May
      Putnam Investments names head of global institutional management
      Paul Griffiths
      HSBC Asset Management selects next global head of institutional business
      Alex Bernhardt
      BNP Paribas AM picks global head of sustainability research
    • State pension plan funding advances in first quarter – Wilshire
      Sacramento County Employees rebalances equity, fixed-income portfolios
      CAAT pension plan scores 11.1% gain in 2020
      The headquarters of the California Public Employees' Retirement System, Sacramento
      CalPERS board votes to add long-term comp for CIO post
    • Walker & Dunlop appoints managing director
      First Eagle starts small-cap equity team with liftout from Royce
      Philip Pearson
      Hymans Robertson chooses head of LGPS investment
       Kaitlin M. May
      Putnam Investments names head of global institutional management
    • European private equity deal value, volume hit records for first quarter
      Paul Morrissey
      Blackstone Growth picks managing director to lead European investing
      Bills of euro, dollar and pound currencies, among others
      Ardian closes latest buyout fund at $8.8 billion
      Hand typing on stationary iPhone at an office reception desk
      Private equity’s taste for tech spurs $80 billion deal spree
    • BentallGreenOak closes latest European fund at $2.3 billion
      Cohen & Steers adds team for new private real estate business
      Australia’s Centuria makes takeover bid for Primewest
      CalSTRS indutrial property
      Investors hungry for industrial properties
    • Andy Schreiner
      New PEPs targeting firms without retirement plans
      Jackie Walorski
      Contribution catch-up for caregivers gaining favor
      Retirement cartoon
      Hopes rising for retirement readiness in 2021
      Neal and Brady
      Retirement security could be only issue both sides accept
    • A coin representing Bitcoin cryptocurrency in the U.K.
      Cryptocurrency and digital assets
      Corporate pension contributions
      Eddy Awards 2021
      COVID-19: One year in
    • U.S. still a key market for investors
      Collected coverage of P&I's 2020 WorldPensionSummit
      Pedestrians pass a large advertisement on the Arndale Center shopping mall reading 'Act now to avoid a local lockdown' in Manchester, England
      COVID-19 puts new opportunities and risks on the agenda - WPS panelists
      Screens display stock price information over the trading floor of the NYSE Euronext exchange in Paris
      Private assets will continue to grow in portfolios – WPS panelists
  • Data
    • Research Center
    • Searches & Hires Database
    • Searches & Hires News
    • RFPs
    • Charts / Infographics
    • Sponsored Research
    • Trackers
    • Q2 2020 searches and hires overview report
      Q2 2020 money manager M&A activity summary
      Q2 2020 legal overview report
      Q1 2020 searches and hires overview report
    • Chicago Policemen on lookout for passive manager
      Iowa Public Employees seeks investment consultant
      New York State Common slates $400 million for renewable energy
      Texas County commits $100 million to another Taconic credit fund
    • Chicago Policemen on lookout for passive manager
      Iowa Public Employees seeks investment consultant
      New York State Common slates $400 million for renewable energy
      Texas County commits $100 million to another Taconic credit fund
    • Emerging Market Debt Manager Services
      Real Assets Consultant
      Passive Investment Management Services
      Active Extended Global Credit Manager Search
    • High-yield spreads narrow, default rates drop
      Private real estate funds continue rebound
      Managed account adoption stalls in 2020
      U.S. bonds have worst quarterly return since 1981
    • Institutional Investors: Shared Expectations, Divergent Paths
      Global Investor Study 2016
      Workplace Financial Wellness
    • U.S. Endowment Returns Tracker
      Pension Fund Returns Tracker
      Earnings Tracker
      Corporate Pension Contribution Tracker
  • Insights
    • Opinion
    • White Papers
    • Industry Voices
    • Letters to the Editor
    • Partner Content
    • Publisher's Update
    • BPTW cartoon
      P&I’s Best Places to Work marking a milestone
      Marcie Frost
      CalPERS: Urgency underscores all areas of providing retirement security
      CalPERS cartoon
      Urgency underscores CalPERS' search for a CIO
      Multiemployer plans cartoon
      Money — but no fixes — for multiemployer plans
    • Bipsync Client Stories: RMS in Action at Pensions and Superannuation Funds
      COVID-19 Makes LP Portfolio Management More Important Than Ever
      China: the outlook is bright for longer-term investors
      Finding Differentiation in Securitized Assets
    • John Bakarat
      Commentary: COVID-19 and real estate debt – where investors should be looking
      Jake Remley
      Commentary: Inflation expectations vs. reality in the bond market
      Greg Shea and Steven Kindred
      Commentary: The solution for yield-seeking allocators may be hiding in plain sight
      Jim Park
      Commentary: Asian Americans, Pacific Islanders face ‘bamboo ceiling’ in money management
    • Marcie Frost
      CalPERS: Urgency underscores all areas of providing retirement security
      Writer using a typewriter
      OCIO industry needs to adopt GIPS
      Writer or journalist workplace. stock illustration
      Even as it assails China, Trump administration emulates it
      Skeptical of Main Street support for proxy adviser proposal
    • P&I Content Solutions
      Research for Institutional Money Management
      P&I Content Solutions
      Top questions for institutional investors
      Sponsored Content By Newton Investment Management
      Growth and Innovation in Emerging Markets
      P&I Content Solutions
      Fixed income 2021
    • Help us help you by supporting quality journalism
      You Must Believe in Spring
      Everything Must Change
      Tomatoes & Investments
  • Multimedia
    • Videos
    • Webinars
    • Polls
    • Slideshows
    • Charts / Infographics
    • Invesco logo shown on the floor of the New York Stock Exchange
      watch video
      1:28
      Invesco’s bid for performance gains
      watch video
      1:23
      The passive fixed-income glut
      watch video
      1:38
      Is it time for DC plans to embrace private equity?
      watch video
      5:39
      The coronavirus pandemic: One year later
    • New Outlook on Income: A Framework for Evaluating DC Retirement Income Solutions
      Investing in infrastructure at the right price
      Time for Action: Shifting Pension Dynamics from a Macro and Regulatory Relief Perspective
      Understanding the PEP Evolution
    • POLL: Cryptocurrency investing
      POLL: The Biden infrastructure plan
      POLL: Retirement income solutions
      POLL: Working after the pandemic
    • view gallery
      9 photos
      Coronavirus and the markets
      view gallery
      22 photos
      The 1,000 largest retirement funds: 2020
      view gallery
      10 photos
      Outlook 2020
      view gallery
      10 photos
      2019 as seen through the eyes of Roger
    • High-yield spreads narrow, default rates drop
      By the Numbers for April 2021
      Graphic: The state of DC plans
  • Events
    • Conferences
    • Webinars
    • DC Investment Lineup Virtual Series
      ESG Investing Virtual Series
      Private Markets Virtual Series
      Retirement Income Conference
    • New Outlook on Income: A Framework for Evaluating DC Retirement Income Solutions
      Investing in infrastructure at the right price
      Time for Action: Shifting Pension Dynamics from a Macro and Regulatory Relief Perspective
      Understanding the PEP Evolution
  • Careers
  • Research Center
MENU
Breadcrumb
  1. Home
  2. REGULATION AND LEGISLATION
March 17, 2014 01:00 AM

Misguided search for revenue

  • Tweet
  • Share
  • Share
  • Email
  • More
    Reprints Print

    The federal government's appetite for more revenue to feed an expanding federal budget threatens to jeopardize retirement income security.

    President Barack Obama's budget proposal and the ambitious tax-code restructuring proposed by Rep. David Camp, R-Mich., have some common ground in limiting retirement savings.

    Both would target high wage earners and high retirement plan savers. Both also would undermine the goal of expanding retirement plan coverage and the accumulation of retirement assets.

    Mr. Obama's proposal, similar to one he introduced last year without success, would aggregate each participant's retirement plan assets — defined benefit, defined contribution and individual retirement account — and limit the combined tax-exempt accumulation to one that would allow a maximum annual retirement benefit equivalent of an annuity payable at $205,000. Based on current annuity rates, that would allow for a maximum combined accumulation from all plans of $3.4 million.

    In addition, the president's proposal would limit the rate at which taxpayers can reduce their tax liability for retirement-related contributions to 28%. That limit would affect a participant or couple earning, respectively, more than $183,000 or $225,000.

    Mr. Camp seeks to steer contributions to bring in more federal revenue upfront from defined contribution plans and IRAs.

    One part of his proposal would subject all contributions to defined contribution plans by people in the 35% tax bracket to a 10% surtax, as well as continuing to tax retirement plan distributions.

    The 10% surtax would give participants an automatic loss on their contributions, requiring them to earn back an even larger amount in investment return — an 11.1% return — just to break even on their contributions before they can start to build the assets based on them.

    That return is quite a hurdle to overcome, higher than the historical rate of return on the equity market and higher than the assumed rate of return on defined benefit plans. That financial burden would have caused a devastating setback in the last few years of the last decade as participants tried to climb back from investment losses during the financial crisis that wiped out some 30% or more of their defined contribution assets.

    In addition, Mr. Camp's proposal would allow up to $8,750 — half the current contribution limit — to be contributed to either a traditional or Roth plan, whether an IRA or defined contribution. Any larger contribution would have to be dedicated to a Roth plan. Roth plan distributions would continue to be tax free during retirement. The change would affect few participants, according to Mr. Camp, whose figures show almost 85% of plan participants contribute less than $8,750 to retirement.

    The greater tax attention directed at the high wage earners serves the federal government's goal to raise more revenue but does nothing to bolster retirement assets of participants below the upper bracket wage level. At the same time, it adds to the administrative complexity of employer-sponsored plans, subjecting all participants, high and low earners, to the reduction in corporate resources and support for pension program contributions.

    Down the road, the proposals could affect more than the small set of participants they are estimated to affect now, especially as interest rates and incomes rise.

    In a 2013 study of the president's previous proposal, the Employee Benefit Research Institute, Washington, estimated more than 10% of 401(k) participants, assuming no defined benefit accruals, “are likely to hit the proposed cap sometime prior to age 65, even at the current historically low discount rate of 4%.”

    At a higher discount rate closer to historical averages, “the percentage of 401(k) participants likely to be affected by these proposed limits increases substantially,” the study notes. With the addition of 401(k) participants who also have defined benefit plans, nearly one-third could be affected by the proposed limit at an 8% discount rate.

    Participants who have built retirement assets did so by following rules, not through any abuse. They were doing what the government wanted them to do. In addition, defined contribution and other retirement programs are tax-deferral plans, not tax-avoidance plans. Taxes that are deferred now will be paid by participants as defined benefit pensions are paid out and as assets in defined contribution plans are withdrawn.

    Mr. Camp's surtax would impose a double taxation on contributions, going into the plans and coming out.

    In calling for the tax-favored treatment of $200,000 in annual retirement income, Mr. Obama in his proposal states the amount is “substantially more than is needed to ensure a secure retirement.”

    The National Associate of Plan Advisers, an affiliated organization of the American Society of Pension Professional and Actuaries, points out Mr. Obama's own presidential pension value is $5 million, more than 40% higher than the total allowed for private-sector participants.

    Mr. Obama's proposal would add to administrative complexity of aggregating all retirement programs and coordinating contribution limits. That complexity also would add to employer and IRA trustee expenses. That cost would likely be passed down in one form or another to participants through lower contributions or higher fees.

    Mr. Obama, Mr. Camp and Congress should focus on the challenge of bolstering pension plan coverage and retirement asset accumulation.

    Mr. Obama's MyRA retirement plan takes a step in that direction for employees without coverage. It should, however, provide an opportunity for participants to earn a better return. His proposal now provides for no risk of loss but offers no chance for gain above a small percentage. It would earn the same return as the Thrift Savings Plan's government securities investment fund, which was 1.89% last year. Participants should be conditioned for the risk-and-return trade-off, which provides a better chance to build assets for retirement. The president also should map allocations to low-cost index funds like those available in the Thrift Savings Plan.

    Mr. Camp should leave the retirement plan tax benefits unchanged in his tax-reform efforts. Strengthening retirement savings will help the economy by providing money for capital investment. It will ultimately ease some of the strain on the Social Security System, and if it is strong enough, it would make Social Security reform politically possible. n

    Recommended for You
    Standards-of-conduct rules approved along party lines
    Standards-of-conduct rules approved along party lines
    Investors hail SEC guidelines on exchanges
    Investors hail SEC guidelines on exchanges
    SEC passes Reg BI package by 3-1 vote
    SEC passes Reg BI package by 3-1 vote
    Research for Institutional Money Management
    Sponsored Content: Research for Institutional Money Management
    sponsored
    Events
     
     
    Sponsored
    White Papers
    Bipsync Client Stories: RMS in Action at Pensions and Superannuation Funds
    COVID-19 Makes LP Portfolio Management More Important Than Ever
    China: the outlook is bright for longer-term investors
    Finding Differentiation in Securitized Assets
    Green and sustainable bonds in emerging markets
    Portfolio Protection: One Size Fits None
    View More
    Sponsored Content
    Partner Content
    The Industrialization of ESG Investment
    For institutional investors, ETFs can make meeting liquidity needs easier
    Gold: the most effective commodity investment
    2021 Investment Outlook | Investing Beyond the Pandemic: A Reset for Portfolios
    Ten ways retirement plan professionals add value to plan sponsors
    Gold: an efficient hedge
    View More
    E-MAIL NEWSLETTERS

    Sign up and get the best of News delivered straight to your email inbox, free of charge. Choose your news – we will deliver.

    Subscribe Today
    April 5, 2021 Page One

    Get access to the news, research and analysis of events affecting the retirement and institutional money management businesses from a worldwide network of reporters and editors.

    Subscribe
    Connect With Us
    • RSS
    • Twitter
    • Facebook
    • LinkedIn

    Our Mission

    To consistently deliver news, research and analysis to the executives who manage the flow of funds in the institutional investment market.

    pilogo-NEW
    About Us

    Main Office
    685 Third Avenue
    Tenth Floor
    New York, NY 10017-4036

    Chicago Office
    150 N. Michigan Ave.
    Chicago, IL 60601

    Contact Us

    Careers at Crain

    About Pensions & Investments

     

    Advertising
    • Media Kit
    • P&I Content Solutions
    • P&I Careers | Post a Job
    • Reprints & Permissions
    Resources
    • Subscribe
    • Newsletters
    • FAQ
    • P&I Research Center
    • Site map
    • Staff Directory
    Legal
    • Privacy Policy
    • Terms and Conditions
    • Privacy Request
    Pensions & Investments
    Copyright © 1996-2021. Crain Communications, Inc. All Rights Reserved.
    • NEWS
      • Asset owners and the coronavirus
      • Alternatives
      • Consultants
      • Coronavirus
      • Defined Contribution
      • ESG
      • Frontlines
      • Hedge Funds
      • Investing / Portfolio Strategies
      • Money Management
      • Pension Funds
      • People Moves
      • Private Equity
      • Real Estate
      • Searches & Hires News
      • SECURE Act
      • Special Reports
      • WorldPensionSummit
    • Data
      • Research Center
      • Searches & Hires Database
      • Searches & Hires News
      • RFPs
      • Charts / Infographics
      • Sponsored Research
      • Trackers
    • Insights
      • Opinion
      • White Papers
      • Industry Voices
      • Letters to the Editor
      • Partner Content
      • Publisher's Update
    • Multimedia
      • Videos
      • Webinars
      • Polls
      • Slideshows
      • Charts / Infographics
    • Events
      • Conferences
      • Webinars
    • Careers
    • Research Center