Unintended Consequences – 401(k)s and RFRA

It’s not uncommon for a program designed to help one group to get coopted by others and end up harming some people. The Religious Freedom Restoration Act of 1993 and 401(k) retirement plans are two examples of unintended consequences.

401(k) Plans
Let’s start with 401(k) plans. Most employees are familiar with this retirement savings plan option. This section of the Internal Revenue Code provides for favorable tax treatment on retirement savings and certainly seems like a good idea. It allows employees to save for retirement with a portion of their salary or wages that is not subject to income tax. When originally devised, however, it was not intended to be a program for the masses.

At the urging of large employers in his district, republican Representative Barber Conable of Upstate New York suggested a program that would allow for tax-deferred savings for retirement. Conable was the top republican on the House Ways and Means Committee and the suggestion ended up in the hands of Committee staffer Richard Stanger who was the chief author of the 401(k) section of the tax code.

According to Hedrick Smith, author of Who Stole the American Dream, the concept for 401(k) plans originated with Xerox and Eastman Kodak because they were looking for an additional benefit to offer their executives. The top tax rate in 1978 was 70% and the ability to shield some of high earners’ income from 70% taxation was a significant benefit.

Things changed in 1980 when benefits advisor Ted Benna locked onto the 401(k) as a way to make the program more universal. At the time, the rules allowed for a 25% contribution into a 401(k) plan not to exceed $30,000 per year. This was a substantial increase over traditional deferred benefits plans which contributed 6% of an employee’s income on average toward future pension payments.

Four things happened which made the 401(k) a much less valuable tool for retirement.
1. While 401(k) plans provide for higher investment levels than traditional pension plans, workers today only invest 1.4% of their income on average in 401(k) plans;
2. Once companies adopted 401(k) plans for their employees, they did away with the traditional pension plans in which they had typically invested 6% toward employees’ retirement;
3. Investment management companies latched on to 401(k) plans as a good income source and charged high management fees which greatly reduced the employees’ 401(k) plans’ performance; and
4. Individual investors were more likely to choose risky investments than were seasoned pension fund managers which also reduced the employee’s investment performance.

So the 401(k) was not a bad retirement investment instrument, but it has morphed into a vehicle of high fees and poor performance, and allowed employers to drop traditional pension plans which historically provided a steady income to retirees.

RFRA
What about the federal Religious Freedom Restoration Act of 1993? RFRA, as it is known, is a federal law which “ensures that interests in religious freedom are protected.” The bills were introduced by two liberal lawmakers (Sen. Kennedy, D-MA and Rep. Schumer, D-NY) in response to an unpopular 1990 Supreme Court decision, and in what seems inconceivable today, passed the House unanimously. All but three senators voted in favor of the bill and President Clinton signed it into law.

The Supreme Court decision in 1990 that prompted this law (Employment Division v. Smith) upheld the firing of two Native American drug counselors for ingesting peyote during a Native American Church religious ceremony. The lawmakers’ intent was to entrench protection from repercussions as a result of the free exercise of religion. A later Supreme Court decision determined that the federal law could not be applied to state jurisdictions.

While the original religious freedom law was intended to protect a person whose religious practices may put him at odds with an employer or other entity with power over him/her, current state religious freedom laws seem to have a different purpose. While claimed to protect business owners from repercussions should they refuse to serve a customer with whom they have a religious objection, many of these laws have become a means to restrict the rights of lesbian, gay, bisexual and transgender people (LGBT).

Let’s look at Mississippi.

Section 2 from Mississippi’s “Protecting Freedom of Conscience from Government Discrimination Act.”
“The sincerely held religious beliefs or moral convictions protected by this act are the belief or conviction that:
(a) Marriage is or should be recognized as the union of one man and one woman;
(b) Sexual relations are properly reserved to such a marriage; and
(c) Male (man) or female (woman) refer to an individual’s immutable biological sex as objectively determined by anatomy and genetics at time of birth.

There’s no doubt why this law was enacted. It was written to restrict the rights of LGBT individuals and entrenched that discrimination into law. Under this legislation, it is legal to refuse service to LGBT people including making it legal to fire a person for being gay and evicting a tenant for being a lesbian.

This was not the original intent of the 1993 federal law, but that language has been coopted to change the protection from those will little power (employee) to those with greater power (landlord, employer, business owner).

About tonyj126

I'm a 50+ married man who always seems to have a large backlog of work to do, but also a lot of flexibility in my schedule. Much of the work I do is volunteer or taking care of extended family members. I suffer from, as my priest calls it, "the sin of self-sufficiency," which means I can figure out how to do most things myself, and consequently, reduce the need for community to solve problems. As a logical extention (at least to me), I find myself called to comtemplate the country's and the world's woes and offer my observations. I hope someone out there will find them useful.
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