Principal: Mess with 401(k) Tax Deferrals, and People Will Save Less

Take away the tax advantages tied to 401(k)s, and people will save less.

That was the conclusion of two not-exactly-groundbreaking reports released Thursday – one by the Principal Financial Group and another by the Employee Benefits Research Institute.

Principal’s survey, released by the company whose retirement and investor services division has turned a $449 million profit in the first nine months of 2011, was reinforced by a report from EBRI saying proposed changes to the tax implications for 401(k)s would make Americans saving less.

Discussions about lowering the federal deficit have led to legislators discussing the possibility of cutting some or all of the tax advantages away from 401(k)s.

The Senate Finance Committee recently heard a proposal that would end tax deductions for 401(k)s and replace them with a refundable credit that serves as a matching contribution to a retirement savings account. The Bowles-Simpson Commission proposed in a 2010 report that individual 401(k) contributions should be limited to $20,000, or 20 percent of income.

These types of changes would result in average reductions to 401(k) accounts between 11 percent and 25 percent, depending on income, EBRI said. The organization’s analysis is available here.

Principal surveyed employers. Ninety-two percent told Principal that tax incentives are important in their offering 401(k)s to employees.

Seventy-five percent said tax deferral is the most attractive feature of retirement savings for their employees, and more than 80 percent said employee savings would decrease if the tax advantages were removed. More than half said tax deferral limits should be raised, not lowered.

“They view the tax incentive to the employee as a key driver,” said Greg Burrows, senior VP of retirement and investor services for Principal.

Source: http://blogs.desmoinesregister.com/dmr/index.php/2011/11/10/principal-mess-with-401k-tax-deferrals-and-people-will-save-less/