The Obama Administration's new budget will cap retirement savings for the nation's super-rich, but it's possible that it could affect even smaller-scale savers.
According to advance reports, the administration's budget due out on Wednesday will propose a cap limiting the amount of annual return a retirement account can create to $205,000. If that proposal were enacted today, that would mean retirement accounts would be limited to $3 million in assets. The White House estimates that caps on the tax-preferred accounts would generate $9 billion over 10 years.
"Under current rules, some wealthy individuals are able to accumulate many millions of dollars in these accounts, substantially more than is needed to fund reasonable levels of retirement saving," the White House told Politico last week.
Most Americans may greet this news with a shrug; after all, only a tiny sliver of Americans saving for retirement have that much money saved up. According to a new analysis from the Employee Benefit Research Institute, only around 0.06 percent of total IRA account holders had $3 million as of the end of 2011, and 0.0041 percent of 401(k) accounts had $3 million as of the end of 2012.
Still, there is the potential for that cap to affect yet more people. One is a changing financial environment. Based on past annuity prices, EPRI projects that the account threshold could fall as low as $2.2 million, and even lower if and when interest rates grow.
Of course, a threshold of $2.2 million would still only take into account a small sliver of Americans. But depending on how such a plan is administered, it could discourage employers from providing retirement plans, fears one expert.
"I think a lot of what people are missing about this is this is most likely going to be very, very difficult from an administrative complexity standpoint for employers to deal with this," says Jack VanDerhei, research director at EPRI.
Exactly how such a plan would be implemented is impossible to know right now, as the details are still sketchy. But the difficulty of keeping track of an employee's retirement account—particularly if that employee has multiple accounts held over from last jobs, for example—could cause some employers to throw up their hands, says VanDerhei.
He's not the only one who has voiced concerns about this. Last week, Brian H. Graff, the CEO of the American Society of Pension Professionals & Actuaries fretted in a statement that businesses would "lose their incentive to maintain a plan, and either shut down the plan or greatly reduce benefits."
There's nothing to do right now but wait and see the details of the administration's plan, however.
"Obviously they have something in mind. And whether that means no additional deductible contribution, whether that money has to literally be taken out of the account, we unfortunately don't know," says VanDerhei.
Of course, all this is contingent not only on whether employers find the policy troublesome, but also whether the cap will actually go into effect. Given that presidential budgets tend to be wish lists of an administration's priorities, not to mention constant congressional gridlock, that possibility may be slim, or at least a long way off.