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Posted May 10, 2007 The full Governing Management Letter | Subscribe to The Governing Management Letter GIRARD MILLER’S BENEFITS BEAT Bonus column: Bring on 401(x)! A trio of retirement savings plans is obsolete Questions, success stories or anecdotes about benefit issues in government? The U.S. Chamber of Commerce recently released the report of a blue-ribbon panel making recommendations for the American capital markets. For the investment and retirement industries, one noteworthy recommendation is to consolidate the various retirement savings laws into a single statutory plan design, known inside the Washington Beltway as 401(x). 
Historically, there have been three distinct bodies of IRS code governing defined-contribution plans in the private, nonprofit and public sectors. 401(k) has become the dominant statute for private companies' retirement plans and has overtaken traditional pension plans. In the educational and nonprofit world, 403(b) is the prevailing plan type. For state and local government employees, the deferred compensation statute is section 457(b). For 20 years, the three systems operated quite independently. Computers had to be programmed separately for each section of tax code because the differences were so significant. But over time, and with the passage of several rounds of "converging" tax legislation, there are few remaining substantive differences among the tax codes governing private, nonprofit and public employees. The maximum tax deferrals are almost uniform now, whereas there were once great differences. Loan provisions are now quite similar, and so forth. Portability between the different plan types was codified in the EGTRRA laws of 2001. The remaining differences are mostly in nitpicky little rules that keep lawyers and technicians fully employed but add no value to society.
The financial industry, and especially the mutual fund industry (which has advanced the convergence idea before), would prefer to see a single body of tax law and regulations governing the entire workforce. It's inefficient to maintain separate computer systems to administer these three types of defined-contribution plans, and employees would be less confused if they all followed a single rulebook. Financial planners and retirement counselors would have a single body of law to follow, which would result in less confusion and cost for all. The only major differences between 457 plans for state and local government employees and 401(k) plans for private workers are:
The financial industry is not unanimous on the 401(x) issue because some firms enjoy a niche in the nonprofit, educational and governmental markets and naturally seek to protect their turf. Insurance companies in particular have long dominated the less-efficient 403(b) and 457 markets, having gained market share early because their higher-fee annuity products enabled them to pay for sales costs of enrolling employees with very small accounts. Now that these markets have matured, the other guys want in, and promise greater competition if they can enter those markets without having to design and operate needlessly customized computer systems for these "one-off" markets. Incumbents are fighting behind the scenes to protect their fiefdoms. On this issue, the free-market advocates are right. More competition can only benefit state and local governments and their employees. Fees for investments will be driven even lower if there are more players in the game, especially in the 403(b) market. The costs of record-keeping will be driven to lower levels as the big guys leverage their computer power without the encumbrance of special rules that serve no real purpose any more. Ultimately, most incumbent service providers will keep their customers, but they will be forced to sharpen their pencils and cut their fees as a result of greater competition. Interestingly, stealth lobbyists have succeeded in tucking a Roth 457 provision into the pending "Emergency Supplemental" now in a congressional conference committee, and it's likely that this feature will become universal in 2008. That would leave one less substantive hurdle for consolidation of all these plans into a single 401(x) platform. As for the excise-tax issue, that is easily solved. Under congressional revenue-scoring rules, the U.S. Treasury and IRS would actually benefit if all employees, regardless of sector, were allowed to withdraw retirement accounts systematically upon retirement regardless of age. The sooner Uncle Sam gets his money from the taxes on retirement distributions, the better for the federal budget. The excise tax should apply to everybody if they decide to "lump out" early and take all their savings to buy a speedboat or a Winnebago. But if early retirees withdraw a fraction of their defined-contribution account each year based on life expectancy, there is no reason to impose an excise tax. And of course, if they have Roth accounts, the issue would be moot since then their taxes are paid up-front and retirement age becomes completely irrelevant to Uncle Sam. Last month: Girard Miller, an analyst of benefits and investments with 30 years of experience in the public, private and nonprofit sectors, can be reached at Girardinmalibu@charter.net. © 2007, Congressional Quarterly, Inc. Reproduction in any form without the written permission of the publisher is prohibited. Governing, City & State and Governing.com are registered trademarks of Congressional Quarterly, Inc. |
