Devil in the Details? Gore's Proposal Raises Questions

If Gore’s proposal becomes reality, 401(k) plan participants might be tempted to put less money into their 401(k)s and instead invest it in the proposed Retirement Savings Plus accounts. This could cause more 401(k) plans to fail the non-discrimination tests. 

The Proposal

Gore’s plan involves tax-free personal savings accounts with a government match, separate from Social Security. Married couples making up to $30,000/year could contribute $500 each to their accounts and receive a refundable tax credit of $1,500, effectively a 300% match on their contribution. The contribution levels and match would be scaled according to income levels:

• Married Couple making up to $60,000 – contribute $1,000/each with $1,000 credit/each
• Married Couple making up to $90,000 – contribute $1,500/each with    $500 credit/each

In essence, each income level would be able to set aside an additional $2,000/year from retirement, with support at varying levels from the government. The $200 billion cost of government support over 10 years would reportedly be drawn from the budget surplus, not from Social Security funds.

The Problem

Individuals, particularly those at lower income levels, may be hard-pressed to come up with the necessary contributions. To solve this, they may lower their contributions to 401(k) programs, which are generally matched 50% by employers.

After plan sponsors have labored for years to increase the participation rates of non-highly compensated individuals to 401(k) programs, the Gore proposal could represent a competing program, according to John Hulla, Manager of Employee Benefits and Compensation at Wellman, Inc .

“People in lower income brackets, with limited disposable income, will likely shift their savings from 401(k) plans to the government plan with the enormous match,” said Hulla. “This would make it even more difficult for 401(k) plans to pass non-discrimination tests and further limit what the more highly compensated can save for retirement.”

Gore’s plan resembles previous proposals by the Clinton Administration incorporating a government-sponsored match.  Industry research at the time projected that the resulting flow of contributions out of 401(k) plans could cause as many as 30% of 401(k) plans to fail discrimination tests.  As a result, contributions of highly compensated employees, whose support is often key to these programs, could be reduced.  Some employers might terminate the plan.

The Bottom Line

At present, the proposal is just that – an idea in the midst of a presidential campaign.  James Delaplane, Vice President, Retirement Policy at the Association of Private Pension and Welfare Plans (APPWP) said that while there may be reason for concern, there is very little detail to focus on at this point. 

Delaplane said the proposal could be integrated with existing 401(k) programs, though the result from an administrative perspective could be quite complicated. Ultimately, the role of the employer, and the interaction between private programs and the new plans remain undefined and is critical to a complete assessment.  APPWP is currently evaluating the proposal.

– Nevin Adams       editors@plansponsor.com