ERSAs on Comeback Trail

October 30, 2003 ( - Plan sponsors who thought the Bush Administration's retirement savings proposals were DOA are in for a surprise next year.

Speaking at the annual American Society of Pension Actuaries Conference (ASPA) inWashington , D.C. , Bill Sweetnam, Treasury Benefits Tax Counsel, confirmed that the Bush Administration plans to push for its new breed of retirement savings programs in next year’s budget.   The proposal, outlined last January (see  ERSAs Bear Major Changes for Plan Sponsors ), includes the Employment Retirement Savings Account (ERSA), which would replace employer-sponsored deferral programs, including 401(k)s, 403(b) and 457, SIMPLE and SARSEP programs; the Retirement Savings Account (RSA), designed to replace the current IRA; and the Lifetime Savings Account (LSA), designed as an after-tax, tax-exempt savings account, much like today’s Roth IRA.


Sweetnam told attendees that “These proposals are very popular in the administration. You’ll see them again in the next year’s budget proposals.”   He explained the Administration’s goals as two-fold:   simplification of the current system, and expanding current savings opportunities, particularly for smaller businesses, and the workers they employ.

Calculus Impact

He did acknowledge input on the original proposals from a number of sources (including ASPA), noting that “There’s a financial calculus that a small business owner goes through in deciding to offer a retirement plan.”   Critics of the proposal have argued that it would provide incentives for small business owners to take advantage of the proposed new Lifetime Savings Accounts (LSA) for their retirement savings, rather than undertake the work, risk and expense of establishing a retirement program in their workplace (see  Industry Groups Fret About Impact of Bush Proposal ).  

Sweetnam acknowledged those concerns, and while he admitted that the proposal could affect that calculus, he cautioned that “every change in the tax system” has an impact.   He also said the Administration’s sense was that this impact would only happen at the “very” small plan level.   Most employers would continue to view offering a workplace retirement plan as necessary to remain an “employer of choice,” according to Sweetnam.

For those concerned about the potential impact of the proposals introduced this year, Sweetnam noted that the 2004 version will “look slightly different.”   Noting that Treasury had met with various interest groups over the past year, he said “you will see some changes that reflect the comments received.”

Another controversial proposal from the Bush Administration has been its recommendation for a replacement for the 30-year Treasury bond rate, as it is used in pension calculations.   Sweetnam said that while the new proposal has been criticized as an "untested methodology" (see  Fisher Touts Bush Administration Pension Reform Measures ), he said that the use of an interest rate that matched the expected duration of the plan's liability was akin to the process employed every day by consumers purchasing a certificate of deposit at their local bank.  

He also questioned the perspective that the use of the so-called yield curve approach would engender more volatility in the funding calculations, noting, "If so, then you have a lot of volatility now."   Sweetnam also noted that it was important to consider the accuracy of the calculation, "not just on liabilities, but also on the asset side."   Many smaller plans fund "in a very different way" than large programs, he pointed out, cautioning that larger plans "sometimes go for the home run" with their asset allocation decisions.   "Smoothing makes it more difficult to see the need," he said.

As for prospects for a solution, Sweetnam said that he thought the bill approved earlier in the month by the House of Representatives with a two-year extension was "likely to happen" (see  US House Solidly Approves Pension Funding Bill )."   A good thing, since the current temporary fix expires at the end of 2003.   On October 29, the Senate Committee on Health, Education, Labor and Pensions (HELP) gave another temporary pension fix (the Pension Stability Act sponsored by Chairman Judd Gregg (R-New Hampshire)) its unanimous approval (see  Pension Stability Act Grabs US Senate Committee Ok ).

Other Initiatives

Regarding other recent initiatives, Sweetnam said that the current plan was to have 403(b) regulations out by the end of June to mid-July.   He also noted the issuance of final regulations on 457 plans (see  Final Regs Shed Light on 457 Programs ), as well as proposed 401(k) and 401(m) regulations (see  IRS, Treasury Unveil "New" 401(k) Regs ).   Regarding the 401(k) regulations, Sweetnam said they represented an attempt to "put everything back in one place" after years of additions, deletions and amendments in the Internal Revenue Code.   However, he said they were not intended to change current practices with 401(k) plans, and if practitioners discovered otherwise, they should notify Treasury.   One area that was deliberately changed, however, was the area of  "bottom up" leveling  - which Sweetnam said Treasury had been accosted by some for having "killed" the planning approach, by some for having provided a "roadmap" for how to do "bad things", and by others for not making it effective right away, so that some could do "bad things for a couple of years."

Also (relatively) near at hand could be the finalization of 401(a) regulations, some guidance on the EGTRRA's direction to draft regulations on how plan sponsors can legally eliminate certain forms of benefit that don't impact participants in more than a deminimous manner, and some guidance on 412(i) plans.