November 9, 2012 / 7:45 PM / in 5 years

Retirement plans ready for battle on tax benefits, regulation

* Congress may cap 401(k) tax benefits

* Employers worry small businesses will terminate plans

* Labor Department fiduciary rule expected to return

By Jessica Toonkel

NEW YORK, Nov 9 (Reuters) - Employers with 401(k) plans and the advisers, fund companies and brokerage firms that serve them are gearing up for yet another battle against tax reform and regulation.

With the re-election of President Barack Obama and the looming expiration of a host of tax provisions, retirement plans face two major challenges: Changes to tax laws that could kill or limit tax benefits of these plans and new rules that could make it more difficult for advisers to have a 401(k) plan business.

The chances of tax reform, and a Department of Labor rule placing a higher standard on advisers serving these plans, aren’t new. But over the past few months, industry members had hoped those chances would go away with a victory for Governor Mitt Romney in the presidential election.

“What this means (with President Obama elected to a second term) is that all of the concerns we were worried about are still out there,” said Brian Graff, chief executive officer of the American Society of Pension Professionals and Actuaries, a Washington trade group.


Any tax reform that chips away at the tax advantages of 401(k) plans is at the top of concerns for both employers and the companies that serve them.

Currently, investors who put money into their 401(k) plans do so on a tax-deferred basis, meaning they do not pay taxes on that money until they take it out of the plan.

In 2012, employees are allowed to put $17,000 into their 401(k) plans annually. In 2013, that amount is scheduled to increase to $17,500.

But now the federal government is looking to increases taxes as a way of addressing the deficit facing the country.

A full-scale tax reform could cut or limit specific tax breaks as a way of lowering overall tax rates. President Obama has said he will raise taxes for wealthy Americans, and trade groups representing both employers and financial services firms have voiced concern that the tax benefits of 401(k) plans will get cut.

And so, they are calling in the troops. The American Society of Pension Professionals and Actuaries, a trade group representing firms and advisers that serve 401(k) plans, is introducing a grass-roots social media campaign to rally attention around the tax reform issue. Called “SaveMy401(k),” the effort is scheduled to launch in the next few weeks.

“When [these plans] are arguably the second largest tax expenditure, there is no denying that they are at great risk,” said Ed Ferrigno, vice president of Washington affairs for the Plan Sponsor Council of America, which represents 1,000 employers of all sizes with 401(k) plans.

The most expensive tax breaks, according to the Congressional Budget Office, are exclusions for employer-provided healthcare and retirement benefits and the mortgage interest deduction.

But while 401(k) plan contributions are tax-deferred, the money does get eventually get taxed when employees make withdrawals, said Lynn Dudley, senior vice president of policy at the American Benefits Council, which represents primarily Fortune 500 companies. “The money does come back into the system.”

Trade groups are worried that Congress may reduce how much employees can contribute to their 401(k) plans on a tax-deferred basis. Such a cap could fit the Obama Administration’s stated goal of raising revenues from wealthier Americans.

But it could also result in many small business owners terminating their plans if their tax benefits are less attractive, Ferrigno said.

“These plans are very costly to offer and if small business owners do not get the same tax benefits as they do now, they may decide not to offer these plans,” he said.

Currently 84.5 percent of all 401(k) plans are offered by businesses with less than 100 employees, according to the Employee Benefit Research Institute.

“We are not worried about one specific proposal, we are worried about any cuts in retirement savings,” Graff said.


The second biggest concern for financial services firms that work with 401(k) plans is a return of the Labor Department’s proposal to subject all advisers working with these plans to a higher fiduciary standard of care.

The rule, which the Labor Department originally proposed in 2010, has faced strong opposition from both industry groups and members of Congress who questioned whether the costs of the rule would outweigh the benefits.

But consumer advocates favor a regulation, and believe it is necessary to protect investors.

“You are talking about the least sophisticated, most vulnerable investors who need to make every penny count,” said Barbara Roper, the director of investor protection for the Consumer Federation of America.

Phyllis Borzi, assistant secretary of the Department of Labor’s Employee Benefit Securities Administration, has said she plans to press ahead with a proposal and that it will include Individual Retirement Accounts{ID:nL1E8EM2MA}.

Advisers and brokerage firms worry that the new rule will make it more difficult for them to move employees into rollover IRAs, which is a big business for them.

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