Retirement Planning Center Stage in Regulatory Reform

This week’s Congressional hearings on regulatory reform in response to the nation’s economic tsunami included a hard look at the losses sustained by retirement accounts, the estimated total of which is a whopping $2 trillion over the past 15 months, according to expert testimony at one of the hearings.

The Department of Labor and Treasury and the Internal Revenue Service are laying out their regulatory retirement planning agendas and the future of 401(k)s hangs in the balance. Members of the House Ways and Means Committee’s Subcommittee on Income Security and Family Support are considering the pros and cons of redirecting the tax breaks of the voluntary 401(k) to a new mandatory system of guaranteed retirement accounts, which would constitute a sea change in employee benefit programs.

The proposed retirement system that the subcommittee is examining is the brainchild of Teresa Ghilarducci, director of the Schwartz Center for Economic Policy Analysis at the New York-based New School for Social Research, who was interviewed by Money magazine earlier this year. Ghilarducci’s plan would allow the continued existence of 401(k)s but remove tax breaks on contributions and earnings. In her new book, When I’m Sixty-Four: The Plot Against Pensions and the Plan to Save Them (Princeton University Press), she describes a mixed retirement system composed of Social Security, employer defined-benefit pension plans, and a new type of personal retirement savings account known as a Guaranteed Retirement Account (GRA).

Ghilarducci told Money that under her plan, whatever contributions you’ve made to your 401(k) still won’t be taxed, but most people will have to contribute 5 percent of salary to a GRA. Only that amount will be pre-tax, and the government will contribute $600 per year.

It’s a radical, some say socialistic proposal which, in its purest form, would have 401(k) providers and many 401(k) investors up in arms. But if it develops “legs” as regulators proceed down the long and winding road to retirement reform, it would likely be substantially tweaked.