Their caution centers around two main concerns; that the proposed new Lifetime Savings Accounts (LSA) will effectively siphon off employee dollars normally flowing into company retirement plans and small business owners may be dissuaded from starting a company plan in the first place. The latter concern is particularly ironic, since a stated goal of the proposal is to spur more small business employers to set up such programs (see ERSAs Bear Major Changes for Plan Sponsors ).
“The proposal’s substantial expansion of tax-favored opportunities to save on an individual basis will eliminate the incentive for many small business owners to incur the cost and administrative burdens of establishing a retirement plan for their small business employees,” Brian Graff, executive director of the American Society of Pension Actuaries (ASPA), said in a statement . “Consequently, if this proposal is enacted, millions of our nation’s small business workers will be left without a meaningful opportunity to save for retirement. This is simply unacceptable from a retirement policy standpoint, and thus ASPA is forced to oppose the proposal in its current form.”
Added Graf: “In fact, the data strongly suggests that if the president’s proposal is enacted, the vast majority of small business workers with moderate incomes will simply not save at all. “
Under Bush’s plan, Americans could plough as much as $7,500 annually into the LSA accounts where the funds would grow tax free. The accounts allow savers to withdraw funds for any reason without a requirement that they wait until age 59 ½. Retirement savings accounts (RSA), essentially a revamped IRA, would also carry a $7,500 yearly limit. There are no required minimum distributions at age 70 ½ but there would be an early withdrawal penalty before age 58. Employer Retirement Savings Accounts (ERSA) would allow $12,000 in contributions in 2003, plus an additional catch-up amount for those over 50 (For more specifics on the Bush proposal, see The New Face of Defined Contribution Plans? ).
David Wray, president of the Profit Sharing/401(k) Council of America, also worried about whether the non-employer savings programs will slash the amount of funds now flowing into 401(k)s and other employer plans. “This will result in lower retirement savings as some moderate and lower income employees will make smaller, or no contributions to LSAs and RSAs than they and their employers would have made to their qualified plans,” Wray said.
Softening the Transition
Janice Gregory, vice president at the ERISA Industry Committee (ERIC) said lawmakers and industry group representatives need to pay particular attention to the transition period between existing company retirement plans and the new plans called for in Bush’s proposal.
“All of a sudden we come along and say ‘Excuse me, in a couple of months (the old plan) will be gone’,” Gregory told PLANSPONSOR.com . “The quickness of the changeover is something that people need to think through because you can create such uncertainty and turmoil that you wind up reducing people’s incentive to save at all.”
Also, Gregory said simplified rule changes in areas such a discrimination testing may actually end up being tougher for larger plan sponsors to integrate into their company’s existing policies and practices.
“The plans (currently) meet the needs of the employees and they fit the business environment in which they operate,” Gregory said. “We have to see how (new plan rules) will look in a real setting.”
Finally, despite some reservations about aspects of the Bush package, several of the industry group representatives nonetheless applauded the fact that the Administration put a specific proposal on the table where it can be debated and potentially modified.
“Whether or not we disagree with various items on the proposal, we certainly applaud the administration for thinking big, something that’s a comprehensive approach to retirement savings,” John Scott, director of retirement policy at the American Benefits Council, told PLANSPONSOR.com .