CEO: GOP 401(k) Limit Would Devastate Employer-Based Savings

Deep cuts to 401(k) pre-tax contribution limits would dampen workers’ long-term retirement savings and strike at the heart of the employer-sponsored retirement system, said one financial services CEO.

The favorable tax treatment in the form of a tax deferral is has been a “big driver” pushing people to set aside retirement savings in a 401(k), said Dan Houston, chairman, president and CEO of Principal Financial Group.

“Frankly, our largest concern is that a policy like this doesn't negatively impact long-term retirement savings,” Houston said Friday in an earnings call with Wall Street analysts. “That's kind of at the core of the issue.”

House Republicans are considering lowering the pre-tax cap on 401(k) contributions to $2,400, but critics have panned the proposal. Experts say it could derail workplace retirement plans for wage earners, many of whom don’t have enough set aside to begin with.

Workers can put as much as $18,000 a year in tax-deferred accounts, a figure that rises to $24,000 for workers over the age of 50. In the GOP plan, contributions above $2,400 could be made with taxed money, which would not be taxed upon withdrawal.

Lawmakers in Congress are looking for ways to pass a tax cut and deliver on a major campaign promise of President Donald Trump. Capping contributions to $2,400 would lessen the sum eligible for a tax deferral.

Every tax dollar deferred into the future is a dollar less in tax revenue to the government today.

Issue Cuts Across All Wage Earners

Since the dawn of the 401(k) more than 30 years ago, the retirement savings industry has amassed an estimated $15 trillion in defined contribution plans and individual retirement accounts.

Wage earners in most income categories would be affected by limiting contributions to $2,400, Houston said.

More than one-third – 38 percent – of employer retirement plan participants earning between $10,00 and $25,000 annually would be negatively impacted by limiting annual contributions to $2,400, according to recent modeling conducted by Principal Financial.

Among workers making between $30,000 and $50,000 who have access to qualified retirement plans, 70 percent of them participate compared with only 5 percent who participate but are not eligible for a retirement plan.

The value of employer-based retirement savings relies around payroll deductions, employer matches, profit-sharing contributions and tax deferrals. Remove those incentives and there’s little reason for people to save for retirement.

“I think that gets the attention of a lot of people,” Houston said. “This isn’t a high wage earner issue.”

Principal Misses 3Q Earnings Estimates

Principal Financial on Thursday reported third-quarter earnings of $810.2 million.

The company said it had net income of $2.76 per share. Earnings, adjusted for investment gains, were $1.28 per share.

The average estimate of four analysts surveyed by Zacks Investment Research was for earnings of $1.29 per share.

The company posted revenue of $4.63 billion in the period. Its adjusted revenue was $3.95 billion.

Principal Financial shares have risen 18 percent since the beginning of the year, while the Standard & Poor's 500 index has increased 14 percent, the Associated Press reported.

In the final minutes of trading on Thursday, shares hit $68.20, an increase of 29 percent in the last 12 months.

InsuranceNewsNet Senior Writer Cyril Tuohy has covered the financial services industry for more than 15 years. Cyril may be reached at cyril.tuohy@innfeedback.com.

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Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. He can be reached at cyril.tuohy@innfeedback.com.