Clinton's 401(k) proposal receiving mixed reviews: Experts disagree on whether plan can spur savings

October 29, 2007

Republican presidential candidate Herbert Hoover promised a chicken in every pot and a car in every garage, leading everyone to believe they would be prosperous under his administration.

Fast-forward 80 years and a candidate from the other side of the aisle, Sen. Hillary Clinton, D-N.Y., is offering an incentive more fitting for the new millennium: a match on workers' 401(k) contributions.

Time will tell whether Clinton becomes president and ultimately fulfills the pledge, but what prompted it is Americans' reluctance to save. Recent savings rates are dipping to levels unseen since the Great Depression, or Hoover's presidency.

Clinton's plan would allow all workers to open portable retirement accounts and put up to $5,000 a year in them on a taxdeferred basis. The federal government would match in tax credits the first $1,000 in savings for married couples who earn up to $60,000 a year and the first $500 for married couples who earn $60,000 to $100,000 a year.

The government also would give new tax credits to small businesses to help defray setup costs.

Clinton would pay for the plan by freezing the estate tax at 2009 levels, rather than allowing it to expire temporarily in 2010. Freezing the tax at $7 million a couple would provide the Treasury with more than $400 billion over 10 years, according to Congress' Joint Committee on Taxation.

Local financial planners give the proposal mixed reviews.

Encouraging savings

More needs to be done to encourage saving, and Clinton's idea could be part of the solution, said Juli Erhart-Graves, a vice president and certified financial planner at locally based Worley Financial Group Inc.

"Americans aren't saving enough, so having a $1,000 match for the first $5,000 would be awesome," she said. "It's like free money."

Recent statistics indeed show Americans have a problem stashing away cash. Their personal savings rate dipped into negative territory in 2005, something that hasn't happened since the Great Depression.

The Commerce Department reported in early 2006 that the savings rate fell into negative territory at minus 0.5 percent, meaning Americans not only spent all their after-tax income, but had to dip into previous savings or increase borrowing.

The savings rate has been negative for an entire year only twice-in 1932 and 1933-a time of massive business failures and job layoffs.

Since 2005, however, the savings rate has climbed a bit, registering at 0.5 percent in the second quarter of this year, according to the Commerce Department. Still, the numbers pale in comparison to the 3.5-percent rate in 2001.

Other ways available

Even so, Ron Hanson, a chartered financial consultant and part owner of Hanson & Snyder Personal Financial Advisors in Carmel, is skeptical of the 401(k) match. A plethora of programs already exist that encourage saving for retirement, he argued.

Most recent, the Pension Protection Act signed into law by President Bush in August 2006 contains a provision that allows companies to register workers for retirement plans without requiring them to "opt in."

For automatic enrollment, the law sets the 401(k) base contribution level at no less than 3 percent of an employee's salary starting Jan. 1, 2008. The rate increases 1 percent a year until it reaches 6 percent, or no more than 10 percent.

The maximum amount participants can contribute rises to $15,000.

The act has implications for individual retirement accounts as well. Annual limits in 2008 rise to $5,000, or $6,000 for the over-50 crowd.

Roth IRAs and 401(k)s also have been made permanent. Unlike traditional 401(k)s and IRAs, the money saved into Roth plans is taxed upfront. But the longterm benefit could be well worth the initial loss, because no taxes are owed upon withdrawal at retirement.

"We really have plans in place already that people can contribute to," Hanson said. "The solution is not to set something new up, but to educate people on the importance of planning for retirement."

One concern Erhart-Graves at Grace Financial Group has is that employers might point to the tax credits as an excuse to not provide their own matches.

Others wonder whether workers will even invest the $1,000 back into their 401(k)s at all, because the credits would appear on income tax returns.

For third-party administrators, that means no additional work would be involved, however.

"In essence, it's a government program passed through fairly inefficient government processes," said Jim Robison, a principal of locally based White Oak Advisors. "History, from 1900-forward, shows that it's hard to keep the reins on a government-funded program."

Wealthy taxpayers who would fund the program represent a "very small percentage" of the population, said Kristin Fruehwald, chairwoman of Barnes & Thornburg LLP's estate-planning practice group. Indeed, Clinton said only 7,000 families would be affected nationally.

"Still, those people who are hit with this tax are hit in a very dramatic fashion," said Fruehwald, noting 45 percent of their assets would be subject to taxes.

Current law calls for the estate tax to be phased out in 2010 and return the following year. If it holds, households worth more than $1 million would be taxed at a rate of 55 percent-pre-2001 figures.

A federal appeals court has ruled against Indianapolis-based shopping mall giant Simon Property Group in a case revolving around whether dormancy fees can be charged on gift cards.

The U.S. Circuit Court of Appeals in Manhattan on Oct. 19 sided with the state of Connecticut in its ban on the practice, according to Bloomberg.

If an unused balance on its Crystal Mall cards lingered six months, Simon reduced the value of the card by $2.50 per month. Simon also charged $7.50 to reactivate an expired card.

The appeals court also asked a lower court to reconsider the matter.

Simon won a countersuit in which it claimed that the cards fell under federal banking regulations rather than state law because they were issued by Bank of America Corp.

Simon said in a statement late this afternoon that the most recent decision doesn't affect an existing gift card program it has operated since 2005 through US Bank and Metabank.
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