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Scrambled Eggs:
Bush Savings Proposals Start Discussions

For many in the retirement savings community, when it comes to President Bush's savings proposals, the question may be how do you like those eggs? And like most, the answer is probably without the shell. However, the Administration served some shell to members of the retirement network by taking an approach that did not build upon most existing saving structures.

The Administration proposed three savings vehicles for individuals to make after tax contributions:

• For more on the Administration's economic growth package and its affect on pensions see "Eliminating the Double Taxation of Dividends" article in this issue.

  Lifetime Savings Accounts (LSA) would permit up to $7,500 per year to be saved for any purpose and could be withdrawn and used at the discretion of the saver without penalty. The LSAs would fold in the Archer or medical saving accounts, the Coverdell Education Savings Account and 529 educational savings plans.

  The proposal would allow conversion of previous savings vehicles into a LSA until 2004. Account balances would be continued and carried forward after that date. The Administration's proposal allows the previous savings vehicles and the new LSA to co-exist. However, some may prefer the flexibility of the new LSA to the older vehicles.

• Retirement Savings Accounts (RSA) would permit up to $7,500 per year to be saved for retirement. RSAs would replace traditional and Roth Individual Retirement Accounts (IRAs). Like IRAs, the new RSA savings vehicles could only be used for retirement. Further, RSA earnings would be tax-free like Roth IRAs and distributions also would be tax-free after reaching age 58 or in the case of disability or death.

  Traditional IRAs can be converted into RSA or continued. However, new contributions would not be permitted in traditional IRAs. Current balances could continue in the IRA tax-deferred under current rules until retirement, disability, or death. Conversions from traditional IRAs would be subject to tax since RSA contributions are based on after-tax contributions.

• Employer Retirement Savings Accounts (ERSA) would permit up to $12,000 per year to be saved for retirement. ERSAs would replace the assortment of defined contribution plans that have developed over the years: 401(k), 457 and 403(b), SARSEPs and SIMPLE IRA plans. Defined benefit plans and other plans that do not permit employee contributions would remain unchanged.

  The Treasury Department's Assistant Secretary for Tax Policy, Pam Olson asserts that ERSAs offer all the benefits of a defined contribution plan to both employer and employee without the baggage or complexity. ERSAs attempts to eliminate the downside of defined contribution plans by: simplifying their rules, repealing top heavy rules, streamlining discrimination testing, and proposing a new safe harbor test.

  Olson says that ERSA's simplification will encourage small business to sponsor more plans and that it is the current tax code's complexity that has had pension coverage stuck at 50%. She adds that ERSAs will provide a big incentive: reduced plan costs for small employers to establish an ERSA, which will contribute to increased pension coverage.

Some disagree with the proposal. Senator Ted Kennedy (D-MA) calls the Administration's proposal, "the greatest redistribution of tax preferences from working families to the wealthiest families." Others charge the Administration plan will shift current savings into these new tax-advantaged vehicles providing some $15 billion revenue in the early years (as individuals move from tax-deferred accounts into the new after-tax LSA and RSA accounts) to the President's budget proposal.

Others say that LSAs and RSAs will create a disincentive for small business to establish any type of defined contribution plan because of their generous contribution limit, up to $30,000 a year for a married small business owner and his or her spouse. Some claim the lure of LSA's unrestricted savings will motivate individuals to move their retirement savings and other tax-advantaged savings like 529 and MSA plans into the LSA vehicles since they provide more flexibility on the spending side. Others claim that eliminating rules that link executives pension contributions to participation of lower-paid workers will result in lower participation and savings by the same lower-paid workers.

Yet others claim that defined contribution plans like the ERSA will retain their allure because of employer matching contributions and the additional benefits employer plans bring such as a professional fiduciary and the buying power of big bucks. They say the economics of an upfront deduction for savings contributions is what gets some to save.

What is a given, according to a March 17, 2003 article in Fortune, is that pensions have historically provided only 24% of retirement income and Social Security will not be making up the balance. I believe that employer-provided plans need to part of the solution for individual savers.

Employer provided plans provide assurances that cannot be underestimated or obtained on an individual basis, which is the power of the employer. Employers bring to the table cost-effective saving vehicles as a result of having the buying power of big numbers, a broad and effective array of risk-diverse and screened investment options, ERISA's fiduciary requirement that decisions be made for the exclusive benefit of plan participants and beneficiaries, matching contributions, and the ease of savings through payroll deductions.

That's a lot for investors to give up. Let's make sure employer-provided defined contribution plans remain not only a solid option for individuals to save for retirement but a preferred and privileged vehicle. And individuals are privileged, if they are offered and fully participate in an employer provided defined contribution plan.

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