New from EBRI: Tax Reform Proposal Could Clip 401(k) Balances
March 20, 2012
A recent proposal to change the tax preferences for employment-based 401(k) retirement plans could result in an average reduction in 401(k) account balances of between 6‒22 percent at Social Security normal retirement age for workers currently ages 26‒35, according to new research by EBRI.
The response—a combination of plan sponsor reaction and participant response—is strongly tied to plan size, with participants in smaller plans likely to experience deeper average reductions in 401(k) balances, according to EBRI’s baseline analysis. For plans with less than $10 million in assets, participant balances at Social Security normal retirement age for workers currently ages 26‒35 could decline between 23‒40 percent, depending on the size of the plan and income of the participant.
EBRI’s report is the first to analyze the response of both private-sector 401(k) plan sponsors and participants to a proposed scenario where the current tax treatment of employer and worker pre-tax contributions would be modified such that workers would have to pay federal taxes on these amounts currently, rather than on a deferred basis (as under current law), and participants would receive an 18 percent government match on all contributions.
“Some analyses of recent proposals to change the tax preferences for employment-based 401(k) retirement programs have assumed status quo in plan design and contribution flows,” notes Jack VanDerhei, EBRI research director and author of the report. “Surveys of individual participants suggest, however, that some would decrease or even eliminate their contributions in response to these changes. Additionally, surveys of plan sponsors indicate that many would modify their plan design, or even terminate these plans.”
Full results of the study are published in the March EBRI Notes, “Modifying the Federal Tax Treatment of 401(k) Plan Contributions: Projected Impact on Participant Account Balances.” The press release is online here.