Redefining Defined Contributions

Tuesday, November 1, 2011
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Faced with a still-flailing economy and wavering confidence in their job security, millions of U.S. workers are already losing sleep over their financial futures. Proposed changes to reduce current-law tax limits for savings in retirement plans could give them another reason to toss and turn at night -- and is cause for HR leaders to re-examine the design of their organizations' 401(k) plans.

There are several proposals on the table, including reports from the Fiscal Commission and Bipartisan Policy Center, recommending a return to pre-1986 caps on both the amount and percentage of total employer and employee contributions to a qualified defined-contribution plan at $20,000, or 20 percent of compensation, whichever is lower.

If the proposed "20/20 caps" are imposed, which they could be as early as 2012, workers at both the highest and lowest ends of the income spectrum figure to be hit the hardest, according to preliminary research, says Jack VanDerhei, research director of Employee Benefit Research Institute, a nonpartisan, nonprofit group based in Washington.

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Another proposal, by Brookings Institution Fellow William Gale, would end the current exclusion of worker contributions for retirement-savings plans in 2012 and replace them with flat-rate tax credits.

The most immediate impact of that would likely be the elimination of defined-contribution plans, says Gary Kushner, president and CEO of Kushner & Co., a Washington-based firm specializing in HR strategy and employee-benefits consulting and administration.

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