Since the proposals were released in April, many in the fund industry have been campaigning tirelessly against them—no surprise for a business in which retirement savings make up the lion's share of the trillions of dollars invested.
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Fund companies claim that while only a small segment of the saver population would be affected by these caps, enacting them would send the wrong message to Americans, who need incentives to save more.
They also argue that the budget proposals will create an accounting nightmare for plan administrators, though this may be the weakest talking point within the staunch fund industry opposition.
Edward Kleinbard, a law professor at the University of Southern California and a former chief of staff of Congress' Joint Committee on Taxation, said that when push comes to shove, record -keeping headaches don't typically sway congressional debate over tax reform. He gave as an example changes made to capital gains taxation requiring securities firms to provide investors with their cost-basis in trades.
"The securities industry said, 'We don't have the technology,' but [Congress'] answer was, 'Yes, you don't have the technology, but you will when we tell you that you must,' " Kleinbard said.
It's a good thing the fund industry has other arguments to make.
"The argument that the Investment Company Institute [ICI] and the industry is making is that many corporations have changed from defined-benefit to defined-contribution plans, and if you are going to modify Social Security, then you need to do more, not less, to help individual investors save for their retirement," said William Glavin, chairman, president and CEO of OppenheimerFunds. "It is big theme we will focus on from the company level and industry level."
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Niels Holch, executive director of the Coalition of Mutual Fund Investors, an advocacy organization, said, "It is counterintuitive to what we should be encouraging: more and more saving by Americans."
It's a legitimate concern that people don't save enough without encouragement, according to Kleinbard.
"We need to give people a push," he said. However, the goal should be to incentivize people who otherwise would not save. There is a good argument to be made for turning off the tax subsidy for successful, high-income people.
Proponent of the proposals point to the Office of Management and Budget's estimates that the roughly $3 million account cap would raise $9.3 billion in revenue over 10 years, shaving off a nice slice off the country's deficit. They also note that the government will continue to provide tax incentives for the vast majority of Americans to save for retirement.
According to the Employee Benefit Research Institute's (EBRI), at the end of 2011, only 0.03% of the 20.6 million IRA accounts in EBRI's database had balances exceeding $3 million, and 0.0041% of 401(k) accounts held $3 million or more by the end of 2012. So the proposed cap would affect less than 1% of IRA and 401(k) account holders.
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Glavin said the proposed 28 percent deduction limit unfairly targets those in the top tax brackets, and if that cap went through, the highest-income earners would do better to invest outside their 401(k) plans on an after-tax basis.
"If they invest for less than 15 years, it's better to pay the taxes upfront than to defer the taxes to later," Glavin said. He also worries that if those employees in the top tax bracket walk away from their 401(k) plans, smaller companies would have a hard time paying the portion of the plan's expenses that those high-income earners had contributed.
Paul Schott Stevens, president and CEO of ICI, said it may not make sense for people with the top marginal tax rate of 39.6 percent to invest in a 401(k) plan, because the 28 percent cap on tax deferral would subject them to an effective tax rate of 11.6 percent on their contributions.
"So if you are in the same tax bracket of 39.6 percent at the time that you withdraw the money, you would have to add that 11.6 percent to determine what your effective tax rate is, which would be 51.2 percent," he said.
Nevertheless, Stevens admits that the issue is more complicated, because you have to consider that the wealth being accumulated in the retirement account is tax-free, as well as the employer match. These tax advantages would be lost if highest earners walked away from their 401(k) plans.
"When we analyzed it, the conclusion we have come to is that you have to have a pretty long holding period inside the 401(k) (over 15 years) in order to surmount the tax detriment you would have from being taxed on the front end and the back end," Stevens said.