Why Obama’s 401(k) deferral phaseout proposal is all wrong

First the Federal Government created a retirement system where the retirement age was 65 when the average life expectancy was 64 for women and 60 for men. Now Social Security is starting to resemble a Ponzi scheme when life expectancy is about 80.

Then the Federal Government made it difficult for plan sponsors to maintain defined benefit plans and then made it easier for them to phase them out.

Now the Federal Government is pushing for fee transparency and investment advice for 401(k) plans and now President Obama is proposing to phase-out the deduction of 401(k) salary deferrals for participants who make over $250,000.

I’m not trying to turn this into a political debate, but I assure you that someone making over $250,000 who lives in New York, Boston, Chicago, San Francisco, Miami, and Los Angeles has not struck it rich.

The problem I have with this proposal (which will be dead on arrival thanks to a Republican House) is that who do you think makes the most deferrals within a 401(k) plan? Those who can afford to make them, those who are financially better off. If these folks stop deferring because they will be taxed twice (first on the deferrals, then at distribution at retirement), then the asset size will be reduced for 401(k) plans, which will increase the cost for everyone else (economies of scale in the 401(k) business means more assets equals less fees as a percentage of assets).  The proposal is also based on the false assumption that those who will lose that exemption on deferrals will still defer.  Another false assumption is that those who make over $250,000 have enough savings for retirement. There are folks who make over $250,000 that spend every nickel they have and the only savings they have is retirement savings. The proposal will end up creating more people who didn’t save for retirement and the last thing this country needs is more problems to the retirement crisis we are facing.

This proposal is short sighted, it is shortchanging the retirement savings of many Americans for easy revenue today to pay for our of control spending. Thankfully, this proposal is going nowhere.

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