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Retirement cap proposal draws fireSaving should be encouraged, local advisers say

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Lots of people have retirement accounts, but not many have balances above $3 million.

"It's a very small percentage of the overall population," said Tim Decker, president of ISI Financial Group Inc. in Manheim Township.

According to a study by the Center for Retirement Research at Boston College, in 2010, median combined 401(k) and IRA balances for households approaching retirement were about $120,000.

But that doesn't mean he likes President Obama's proposal to cap tax-favored retirement benefits, including individual retirement accounts, 401(k) plans and defined benefit plans. The proposal, if it became law, would go into effect in 2014.

There are currently limits on yearly contributions, but the cap would apply to total accumulated assets in the accounts. It would be based on the maximum allowable annual benefit — currently $205,000 for joint and survivor benefit commencing at age 62 — which equates to approximately $3.4 million. It would raise about $9 billion in revenue in the next decade.

"People are not saving too much; they're saving too little," Decker said, outlining his first issue with the proposal: That it could serve as a discouragement, however slight, on something he thinks should be encouraged.

"If the overall objective is to slowly get people off of the reliance on Social Security and to get people doing more for themselves, this does the opposite," he said. "The research shows over and over again that, hands down, the majority of people don't save too much. The problem is, most live for today, and with the attitude that things are going to take care of themselves when the time comes."

David Niggel, president and CEO of Key Wealth Partners LLC in Manheim Township, also sees the proposal as a hindrance, but from a different angle.

"The proposal would create new plan regulations that would fall on the shoulders of 401(k) plan administrators," Niggel said. "This would force many small-business owners to lose their incentive to maintain a retirement plan and reduce benefits for their valued employees."

"The market and amount values of people's accounts change every day," Decker agreed, calling the proposal an administrative nightmare. According to the U.S. Treasury, assessments would be taken at the end of the calendar year.

Brian H. Graff, executive director & CEO of The American Society of Pension Professionals & Actuaries, saw yet another objectionable facet in the proposal.

"We think it is grossly unfair that a small-business owner will be limited to retirement benefits that are nowhere near as valuable as executives' at large corporations," Graff said in a statement released in April. "Small business can't use the nonqualified deferred compensation arrangements that provide millions, even billions of dollars in retirement benefits to big corporate executives. Every time retirement plan limits are cut, the corporate CEOs get more nonqualified retirement benefits. It's the small-business owners, and their employees who lose out and it just isn't fair."

Decker's second major objection lies at the heart of the proposal: the assumption that accounts of $3 million or so are quite adequate to take care of someone in retirement. Good assumptive rates to reckon from are 3 percent withdrawal and 4.5 percent return, he said, which works out to about $90,000 a year before taxes. Depending on the tax bracket, he said, that could be down to about $70,000 — not inconsiderable, but not the kind of income people might assume $3 million in retirement accounts yields.

For perspective, Decker said, it's instructive to consider teacher pensions. To get a yearly payout similar to what a teacher with a generous pension could receive, he said, would require an annuity of $4.5 million to $5 million — "and that would be spending through their annuity."

"President Obama is looking for a short-term gain by taxing high-income earners to pad his budget," Niggel said. "My take is that the cap is short sighted and will hurt the middle class more in the long run."


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