Don't Fall Prey to 401(k) Paranoia


For decades, retirement savers have relied on tax-favored accounts like IRAs and 401(k) plans to help them ensure their financial security after they retire. Throughout past budget crises and economic downturns, the ability to make contributions to retirement accounts has remained a core part of tax law, and contribution limits have expanded substantially over time.

Yet now that the election is over and negotiations over the fiscal cliff are in full swing, some groups believe that retirement accounts could end up on the chopping block as potential revenue raisers. They're taking action to preserve those valuable tax breaks, but in the process, others have taken those concerns a step further and risk misinforming the public with tactics that more closely resemble fear-mongering than responsible advocacy.

Legitimate lobbying
To be absolutely clear, the lobbying that industry groups like the American Society of Pension Professionals and Actuaries are doing to warn the public of the potential that future contributions to 401(k) plans could be in jeopardy appears perfectly responsible. Representing more than 11,000 recordkeeping firms, broker-dealers, and other related retirement-plan services companies, the ASPPA has created the Save My 401(k) website as an advocacy tool to encourage workers to contact their elected representatives to preserve current tax provisions governing 401(k)s.

The ASPPA puts forward a compelling case for why Congress might try to reduce contribution limits to 401(k) plans. Pointing back to the tax reform package during the Reagan administration that resulted in the current framework of the Internal Revenue Code, the group notes that maximum annual contributions to 401(k)s fell from $30,000 before the 1986 reforms took effect to just $7,000 afterward.

All of these concerns are forward-looking, with the ASPPA focused solely on preserving the right to make additional contributions to new or existing 401(k) plan accounts. But across the Internet, some people are sounding far more dire warnings. You'll find fears that Congress will confiscate existing retirement account balances and revoke tax benefits for existing 401(k)s, saddling taxpayers with a huge immediate tax liability in an effort to raise revenue.

Much ado about nothing
Unfortunately, whenever the possibility of changes to laws governing retirement accounts comes up, the same scary stories make the rounds among personal finance discussions. Early this year, when people caught wind of a provision that would have forced those who inherit retirement accounts to accelerate their withdrawals from their inheritances, accusations that the government wanted to confiscate IRAs flew.

Similarly, four years ago, a proposal from Professor Teresa Ghilarducci to replace 401(k) plans with government-managed retirement accounts set off a firestorm of debate. Although legitimate criticisms of the proposal included the huge impact that such a move could have on long-term retirement saving, many people took their criticism several steps too far, incorrectly accusing Ghilarducci of trying to retroactively eliminate existing 401(k) accounts to pull them within the reach of government money-managers.

Contrary to what you may hear from some people, there's no reason to think that policymakers would try to undo the enormously popular institutions that have been in place for decades. With so much political power vested in wealthy people at or near retirement age, a lot of influence wants 401(k)s to stay in their current form.

Vested interest
Moreover, if you're cynical, you can point to the influence of big corporations to perpetuate 401(k)s. As a trade group, the ASPPA has plenty at stake in preserving retirement plans. Among the companies listed as the ASPPA's Firm Partners are nearly a dozen broker-dealers, including Bank of America Merrill Lynch and UBS . The mutual fund groups of Hartford Financial and Manulife Financial's John Hancock unit are also represented on the list.

Don't get me wrong: I'm not saying that you shouldn't contact your elected representatives to tell them your feelings about keeping 401(k) plans in their current form. Any expression of support can only help. But fears about the possibility that retirement plans as we know them will go away anytime soon are overblown, so don't give in to the paranoia that's escalating among the general public.

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Tune in every Monday and Wednesday for Dan's columns on retirement, investing, and personal finance. You can follow him on Twitter @DanCaplinger.

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