EBRI: Cap on tax-preferred 401(k)s would clip large and small earners

If retirement plan contributions were limited to the lower of $20,000 a year or 20% of income, earners on both ends of the financial scale would feel the pain, new research indicates.
A study from the Employee Benefit Research Institute revisited the bipartisan National Commission on Fiscal Responsibility’s recommendation to cap annual tax-preferred contributions to 401(k)s at the lower of $20,000 or 20% of income. The commission, headed by Erskine Bowles and former Sen. Alan Simpson, R-Wyo., came up with the suggestion late last year as part of a proposed blueprint for reducing the national deficit.
At the moment, employers and employees can sock away $49,000, or 100% of a worker’s pay if it does not exceed that threshold.
Using a simulation dubbed the EBRI Retirement Security Projection Model, the organization revealed that if the contribution limits recommended by the commission were put in place, those in the highest income quartile would feel the pain — and in no small amount, either.
Under the cap, workers between the ages of 36 and 45 who are in the top income quartile of that age group could face a 15% reduction in their 401(k) account balances by the time they reach retirement age.
The shortfall would also hit younger workers who ranked within the highest income quartile. People between ages 25 and 36 were likely to take a 12% hit to their retirement account balance by the time they became eligible to collect Social Security.
The retirement account levels of employees in the lowest income bracket would also take a hit. The lowest earners aged 26 to 35 and 36 to 45 could lose nearly 10% of their 401(k) account balance by retirement age if the retirement plan contribution limits were applied.
Though EBRI warned that the impact of the limitation could fall disproportionately on part-time employees, the organization noted that lower-income workers’ current or future contributions combined with what their employer chipped in almost always exceeded 20% of salary.