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Robert Powell's Retirement Portfolio

Jan. 22, 2022, 3:08 p.m. EST

Do 401(k) plans unfairly help the wealthy?

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By Robert Powell

As claims go, it’s a bold one.

Over the course of 82 pages, Michael Doran, a much-beloved but press-shy professor at the University of Virginia School of Law who also worked for the Office of Tax Policy at the U.S. Treasury Department under two different administrations, makes the following case:

“Over the past twenty-five years, Congress has enacted several major reforms for employer-sponsored retirement plans and individual retirement accounts (“IRAs”), always with large bipartisan, bicameral majorities.

“In each case, legislators have claimed that the reforms would improve retirement security for millions of Americans, especially rank-and-file workers. But the supposed interest in helping lower-income and middle-income earners has been a stalking horse for the real objective of expanding the tax subsidies available to higher-income earners.

“The legislation has repeatedly raised the statutory limits on contributions and benefits for retirement plans and IRAs, delayed the start of required distributions, and weakened statutory nondiscrimination rules – all to the benefit of affluent workers and the financial-services companies that collect asset-based fees from retirement savings.

“The result has been spectacular growth in the retirement accounts of higher-income earners but modest or even negative growth in the accounts of middle-income and lower-income earners.

“Despite the benign but misleading rhetoric about enhancing retirement security for everyone, the real beneficiaries of the retirement-reform legislation have been higher-income earners, who would save for retirement even without tax subsidies, and the financial services industry, whose lobbyists have driven the retirement-reform legislative agenda.”

Doran politely declined to talk on the record about his essay, The Great American Retirement Fraud .

But the question is worth asking. Is Doran on to something or not?

To be fair, Doran isn’t the first to suggest that the current retirement system doesn’t work for everyone and that it has more than its share of shortcomings.

In 2004, for instance, Alicia Munnell, the director of the Center for Retirement Research at Boston College, and Annika Sunden, the chief economist at the Swedish International Development Cooperation Agency, published Coming Up Short: The Challenge of 401(k) Plans . In their book, Munnell and Sunden argued that 401(k) plan participants, among other things, are forced to become adept at investing strategies and figure out what to do with the lump-sum payment they receive when leaving an employer.

In 2014, the Bipartisan Policy Center launched the Commission on Retirement Security and Personal Savings as part of an effort to address the challenges facing Americans saving for retirement. The Commission, for instance, called for improving access to workplace retirement savings plans, long a shortcoming or 401(k) plans .

And Teresa Ghilarducci, a labor economist and professor at the New School, and her co-authors found in this 2017 paper that one-third of older workers have neither retirement savings through a 401(k) or IRA, or a defined benefit pension. 

But those interviewed for this column were disinclined to call the current retirement system a “policy scam” and instead referred to Doran’s thesis as a “by-lawyers-for-lawyers” “rant.”

“An 82-page rant deserves a rant in response,” said Nevin Adams, the chief of content officer for the American Retirement Association, who penned this article in response to Doran.

And Andrew Biggs, a senior fellow at the American Enterprise Institute, had this to say: “I’m not a big fan of law review articles on policy; they tend to make broad pronouncements and ad hominem attacks, coupled with a zillion footnotes referencing other law review articles. Very few have much effect on policy discussions; they’re mostly a by-lawyers, for-lawyers kind of thing.”

According to Adams and Biggs, there’s plenty that Doran gets wrong (and ignores) in his treatise. 

Not tax-exempt

For starters, Doran refers to retirement accounts as tax-exempt, nothing more than “federal pork to well-heeled Americans and the financial services industry.”

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