The advisor-to-401(k) business could be set back by Democrats and Republicans

Brooke’s Note: The Center for Due Diligence holds perhaps the premier conference or 401(k)-minded financial advisors and Lisa was there. She was excited when she called me about it; this wasn’t filler content in the sessions. One session covered the political adversities for 401(k) plans contained in this article. Tomorrow she has perhaps an even more interesting report from a panel that has an RIA in a panel discussion with top 401(k) execs from LPL and UBS.

Retirement plan advisors need to brace for a battle with Congress: Legislators on both sides of the political aisle are eyeing ways to ease the deficit – and the 401(k) plan is the perfect target, says Kathryn Capage, director of retirement research for Invesco.

Capage was one of many speakers at this week’s Center for Due Diligence conference in Chicago. She spoke on Tuesday and the conference wrapped up Wednesday, having attracted some 1,100 attendees, most of whom are retirement plan advisors.

The hottest topic of the conference was the fate of 401(k) plans.

Both Republican and Democratic politicians are keenly aware of the money that the government loses in 401(k) plans because of the tax deferrals, says Capage, whose firm is based in Atlanta.

In 401(k) plans, investors’ savings are taxed only when they withdraw their nest eggs in retirement.

A loan, not a gift

The tax-deferred status of 401(k) plans and the amount of money that can be set aside in those plans are being jeopardized by politicians short on options regarding how to save the nearly bankrupt Medicare and cash-strapped Social Security systems. From 2009 to 2013, contributions to 401(k) plans will cost the government $184.3 billion, according to the U.S. government’s Joint Committee on Taxation.

The bipartisan Deficit Panel has proposed reducing the 401(k) savings cap to either $20,000 a year or 20% of a person’s income. That plan would probably affect higher-income workers most dramatically.

An even more draconian plan involves doing away the tax deferral altogether – which could significantly hamper American’s ability to save for retirement, Capage says.

Currently, the annual cap is $16,500, with an additional $5,000 for people aged 50 or older.

“Retirement is considered one of the most expensive deductions [the government] provides, she says. “We’re trying to pound it in their heads that we’re not pulling this money out of society forever – we’re just borrowing it and will be paying it back in large sums. Unfortunately, I don’t know if we’re getting that message across.”

Is Right wrong for 401(k)s?

Capage argued that neither Democrats, who have traditionally championed the middle class, nor Republicans, who are focused on promoting personal empowerment through financial instruments like IRAs, would have any qualms about slicing provisions from 401(k) plans.

“The political winds we’re seeing are rough,” she says. “None of the things I’m seeing are promoting a heavier emphasis on increased contributions in 401(k) plans.”

Speaking to a roomful of advisors and financial leaders who tend to lean to the right of the political spectrum, Capage warned that Republican views on 401(k) plans won’t help advisors.

“You may think the Right is the way to go,” she says. “You may love them from an individual level. But from a 401(k) level, they can be quite scary and mean. They believe in individuals. They don’t think employers should sponsor 401(k) plans.

Capage encouraged advisors to get involved in the political process.

A harder sell

Speaking after the presentation, Capage said that adverse changes to retirement plans would drastically impact 401(k) advisors. “This space could change quite a bit and could become a much harder sell for advisors.”

Still, she added, Congress is so polarized that it could easily hold off on passing any measures affecting 401(k) plans simply because it fails to reach a consensus.

But advisors like Jamie Worrell, president of GPS Investment Advisors, who attended the CFDD conference, are worried. “I just hope they don’t touch it given how underfunded people are in their retirement plans,” he says.

Worrell’s firm manages more than $500 million in assets.

Money to last a lifetime

Congress is also considering requiring that projected monthly income for retirees be included on retirement statements, Capage says.

This would raise many questions – for instance, how would the interest rates be calculated?

She suggested the Department of Labor or the Treasury Department might suggest that plan documents include income projections on participants’ quarterly statements – even if such a measure isn’t passed into law.

“I think it would be wise for participants to see that $100,000 – which might look wonderful – isn’t very strong at all for a 30-year-period,” Capage said.