Biden’s retirement idea getting the cold shoulder

Updated with correction

Trade groups representing plan sponsors have snubbed a proposal floated by President Joe Biden to give individuals across all pay grades equal tax advantages for their retirement savings.

The proposal calls for replacing the current upfront tax break that savers now receive for money they put into their retirement accounts with a flat, refundable tax credit of 26%. The administration's rationale for the proposed shift is that it would be more equitable to lower- and middle-income earners who under the current system receive less of a tax benefit than high-income earners.

Under the current system, for example, a low-income earner in the 12% tax bracket who contributes $1,000 to his or her retirement account would defer paying $120 in taxes, whereas a higher-income earner in the 37% bracket would defer $370, or more than three times as much.

"It doesn't make any sense to make the incentive for saving $1,000 bigger for higher-income people than for smaller-income people," said Alicia Munnell, director of the Center for Retirement Research at Boston College.

Under Mr. Biden's proposal, all savers — regardless of their income level — would receive the same 26% credit for whatever dollar amount they contributed to their retirement accounts that year.

In other words, everyone would get the same $260 credit for their $1,000 contribution, which would be subtracted from any taxes they owe Uncle Sam.

While Mr. Biden hasn't issued a formal proposal, speaking about it only in general terms during his election campaign, plan sponsors have already indicated dismay at an idea they believe will disrupt the current 401(k) savings system, which they see as working fairly well. Plan sponsors fear the change will lead to a drop in retirement savings and require a huge effort to re-educate the workforce about how the new tax incentive would work.

The White House press office did not respond to an email request seeking comment and additional details on the proposal.

"Generally, we would oppose this type of massive overhaul to the 401(k) system," said Will Hansen, chief government affairs officer at the American Retirement Association and executive director of the Plan Sponsor Council of America in Washington.

Aliya Robinson, senior vice president of retirement and compensation policy at the ERISA Industry Committee in Washington, expressed similar reservations. "I think it's always a concern about big wholesale changes and whether or not they'll have the intended impact, especially considering the cost, resources and time and effort that goes into making those changes on the employer," Ms. Robinson said.

Opponents of the proposal say individuals across all income groups are accustomed to the upfront tax advantages they currently receive by contributing their money pretax, a perk without which they would contribute less, particularly among high-income earners whose benefit would fall under the proposed plan.

"It strips away the upfront tax advantages of saving for retirement," said Mr. Hansen, adding that it would lead to a "huge behavioral shift" that would "ultimately decrease savings."

Ms. Munnell of the Boston College Center for Retirement Research is not convinced a shift to a tax credit would alter people's saving behavior. "My sense is absolutely not," she said, explaining that most savers pay little attention to tax incentives and would not spend much time calculating how much greater or less their benefit will be under the new system.

While people are aware of the tax advantage of being able to deduct the amount they contribute to their retirement accounts and "not pay taxes for a while," their sense of participating in a "tax-favored activity" is not going to go away under the proposed new system of tax credits, Ms. Munnell said. "I think precisely how tax-favored the activity is," she said, "is not so important."

"I don't believe much is going to happen in response to this," Ms. Munnell said. "It's just that lower-paid people will get an appropriate benefit from participating."

Aside from concerns about the behavioral response to the proposed change, plan sponsors bemoan the educational effort it would entail. "It would be an uphill battle for participants to understand," Mr. Hansen said.

Some industry observers also fear that the change would discourage small employers looking to offer a retirement plan. That's because successful business owners tend to be in the 32% or 35% tax brackets and therefore would see a much lower tax benefit under the proposed new system than they currently enjoy, said Burke Johnson, the Denver-based executive vice president and chief operating officer of LT Trust, a record keeper that caters to small employers.

"It's likely going to be a lower net tax benefit to a small business owner, so if they look at that, they may be less likely to open a plan in the future compared to today," Mr. Johnson said.

If the proposal moves forward, Ms. Robinson thinks one option might be for the tax credit to apply only to people below a certain income level and for savers to decide whether to switch to the new tax incentive or continue with the current tax deferral.

Such a situation, however, would raise additional concerns among plan sponsors, Ms. Robinson said. "Any time you introduce new choices or differences among participants that creates additional complexity in the administration of the plan," she said.

Because Mr. Biden hasn't released any specifics on the proposal, it appears that it is no more than an idea floated to gauge industry reaction, according to industry observers.

"I think it definitely could come up in the context of various legislation over the next couple of years," said Lynn Dudley, senior vice president of global retirement and compensation policy at the American Benefits Council in Washington. Ms. Dudley was referring to the Neal-Brady and Portman-Cardin retirement savings bills, which include proposals for automating savings and facilitating matching on student loan repayments.

Ms. Dudley is skeptical, however, that Mr. Biden's proposal would be included in those bills because it "would never get through a bipartisan process."

Mr. Hansen echoed similar views. "These types of proposals I think are just generally put out by campaigns more as kind of talking points with the potential of putting together something a little bit more formal down the road," he said. "I think it might be a year or two before we see any activity from the Biden administration."