Changing Taxation of 401(k)s Could Discourage Savings, Sponsors

Many companies would drop 401(k) plans or consider dropping them, according to American Benefits Council survey.

James Klein of American Benefits councilAs politicians search for a way to avoid the fiscal cliff, the tax benefits awarded to defined-contribution retirement plans such as 401(k)s look like a tempting source of new revenue. But a recent survey shows changes in the tax treatment of 401(k) plans could discourage employees from saving and lead some companies to discontinue plans.

According to an American Benefits Council survey of more than 500 companies, 91% of those surveyed say the fact that employees’ 401(k) contributions are excluded from current income tax is either very important or somewhat important in their decision to contribute to the plan, and 73% say employees contribute more to the plan than they would otherwise because of the tax situation.

Robyn Credico of Towers WatsonRobyn Credico, defined-contribution practice leader for North America at Towers Watson, links the greater response from larger companies with their growing realization that older workers who can’t afford to retire pose a problem.  “Larger companies are struggling now with getting people to save enough so they can actually leave the workforce in a meaningful way.”

For years, companies ignored the issue, she says. But in the last three or four years, as more older workers have delayed retirement, companies have started to pay attention.

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