SURVEY SAYS: Readers Weigh in on ERSAs

There was a decidedly negative tone among the readership – at least at this point.   Nearly 30% of this week’s respondents said the proposal ignored the real problems of retirement savings, and roughly 25% said it was too much for the wrong people.

In the latter group was the reader who noted, “They always say they are trying to help the “little guy,” but does it really?   If a small employer can put away $15,000 outside of a plan, why would they bother to have one and all the administrative headaches that go along with one?”

Also in the latter camp was this “frontline” perspective, “I’m fresh off doing hundreds of employee enrollment meetings for a variety of companies.   I talk about the new $12,000 limit for 2003 and mostly get snickers and giggles from the audience.   Only the highly compensated individuals are able to meet those limits.   When I talk about the low savers credit on this year’s tax return, the room becomes interested as people scratch down the directions and ask more questions.   This is where most of the participants I deal with are centered.”

One willing to give the Bush Administration the benefit of the doubt opined, “Perhaps President Bush means well, but, has he surveyed small employers or any employers for that matter?????”

Only about 10% thought it was “just what the doctor ordered,” while about 17% said it was a step in the right direction.   One noted, “I’m 100% for it.   We must have better vehicles to encourage the workforce to save for the future.   Unfortunately, many companies are doing away with their defined benefit plans, new companies can’t afford to install them, and we can’t count on social security to provide enough to live on.   Simplifying the qualification/discrimination rules for a tax-deferred savings plan should make it easier to manage, less costly to administer and, just maybe, encourage employers (as well as employees) to contribute more towards retirement savings.”

Another noted, “This proposal will be opposed by those who thrive on fees developed in servicing plans with exotic plan designs, by those whose service is made necessary by compiling unwanted government forms, by those who cannot provide a cost competitive retirement account, and by those who see anything that might do anything good for highly compensated folks as a call to class warfare.” 

As for suggestions on other steps, there was the reader who offered, “Now if they would only fix the defined benefit plan rules.”

Eighteen percent thought it was too soon to tell – but most of these seemed to be predicated on the assumption that this proposal was a long way from final.   One reader presciently observed, “It would seem that Bush’s proposal surprised many of the legislators that are both well informed on retirement issues and experienced in crafting the laws and working through the system. My opinion is that while something will come out of this proposal, it will be drastically different from the original proposal.”  And another said, “I think it is too soon to tell.   Most professional organizations will not approve of the changes, as their plans are geared to provide more benefits to higher paid employees by cross-testing, integration, or some other allocation method….In fact, with increased dollar limits for IRA-type accounts and no dollar limit, why not just contribute the max to your own and leave your employees alone?   I just wish congress would leave retirement plans alone for a few years, and play with some other areas.”

But this week’s Editor’s Choice posed an interesting question/observation: “Because politicians and lobbyists are involved,   I wonder if ERSA is the illegitimate love child of ERISA and IRS?

Thanks to everyone who participated in our survey!

d.....too much for the 'wrong' people. It's going to take away the motivation for many smaller employers to sponsor plans for their companies....and result in the exact opposite effect that the Bush administration desires.

Simplification of some of the testing requirements and elimination of top-heavy provisions are welcome changes - as well as consolidation of 401k/403b/SARSEP/etc. plans....but your shouldn't remove an employer's ability to set up a plan that also can significantly benefit the key employees of the company via cross-testing, etc. Doing so will eliminate all of the motivation for establishing and maintaining an overwhelming percentage of plans in the already under-represented small end of the market (under 100 lives).

History continues to prove that employees are able to save painlessly via payroll deduction, and only an extremely small percentage of lower-paid employees will save for retirement outside such a structure. Without the ease of payroll deduction, accompanied by the motivation of an employer via education and company contributions, we're going to be looking at a nightmare scenario as the Baby   Boomer generation nears retirement age.

Thanks for providing the link to the updates - I had no idea what the proposals were.   Sounds interesting at the least, and it looks like it will make things easier for employers and plan sponsors.  

Though not an answer to the question posed, the proposed LSAs, in my opinion, are a much more positive change.   The benefits of tax-advantaged saving in one pool for education, retirement, and general household purposes is a great administrative simplification.

Survey:   B - It's a step in the right direction.   Now if they would only fix the defined benefit plan rules.

Believe its (b), with a healthy sprinkling of (e)because the Congress has not yet gotten its hands

on it.

I must vote (c) ignoring the real problems of retirement savings and (d) too much for the wrong people.   The new ERSA's would not solve the problem of low income employees who do not save now.   Even those who are not covered by an employers plan could take advantage of an IRA - but don't.   The new rules would only benefit those who already save and give no incentive for those who do not.   

While it will make the rules simpler and easier to understand - I don't think it will improve the overall savings rate. But with that being said, I must say I like the ideas being proposed. Even if the new types of plans only benefit a select group - that IS the group who signs my paycheck.

This is a bad idea.   After a series of changes to savings incentives, most notably in EGTRRA in 2001, the administration proposes bagging it all and starting over.   Before the ink is dry on the last set of rules.   How can the government expect taxpayers to trust that paying taxes now will buy them tax free distributions forever?   To bind future Congresses from raising revenue from earned income seems very short sited....

As a pension consultant in the midst of massive amounts of compliance work, I'd like to think that retirement savings shouldn't REALLY be this complicated!!

b) a step in the right direction (simplification) but unfortunately also d) - too much for the wrong people. However, you probably can't achieve b) without doing a bit of d) anyway so count me as a b)!

The only ones that won't like it are the ones that pry on the poor with excessive fees.

It would seem that Bush's proposal surprised many of the legislators that are both well informed on retirement issues and experienced in crafting the laws and working through the system. My opinion is that while something will come out of this proposal, it will be drastically different from the original proposal.

Both (c) and (d).   How about (f) anyone without a full-time person to take care of retirement plans will run the other way because just when you figure out what you need to do, there are new rules and regulations.

I think it is too soon to tell.   Most professional organizations will not approve of the changes, as their plans are geared to provide more benefits to higher paid employees by cross-testing, integration or some other allocation method.   I believe that the costs and complexities will still prevent many small companies from starting retirement plans.   In fact, with increased dollar limits for IRA-type accounts and no dollar limit, why not just contribute the max to your own and leave your employees alone?   Sounds like a good business decision, short term, that we negatively affect society longer term.

I just wish congress would leave retirement plans along for a few years, and play with some other areas.

In my opinion, the ERSA's don't do enough to deal with retirement income issues.   It's hard to believe that they will survive the budget process as proposed and while their consideration does shine the light on retirement income issues, there still seems to be no stomach in Congress to address fixing/enhancing Social Security.   Until we can get an approach that considers all aspects of retirement income,   our system will continue to be patched and poked and tinkered with to the point where the end product will have no appreciable improvement.

This is in response to your survey question regarding the subject listed above.

GREAT IDEA!

I'm 100% for it.   We must have better vehicles to encourage the workforce to save for the future.   Unfortunately, many companies are doing away with their defined   benefit plans, new companies can't afford to install them,   and we can't count on social security to provide enough to live on.   Simplifying the qualification/discrimination rules for   a tax-deferred savings plan should make it

easier to manage, less costly to administer and, just maybe, encourage employers (as

well as employees) to contribute more towards retirement savings.

In my opinion a combination of c & d. While some reform of 401(k) plans is perhaps needed the proposed new regulations are NOT a step in the right direction. I pity those who work in the communications area and a charged with explaining this to your 'typical employee' in a way which

is simple to understand and then have them act upon these proposed new regulations.

I'd have to say the President Bush's proposal for ERSA's is ... C) ignoring the real problem of retirement savings.  

If you take the LSA and the RSA and the ERSA contribution limits only the very wealthy will be able to put away money at these levels.   The average "Joe" is just trying to get by paycheck to paycheck and doesn't have much extra money to put into retirement savings.   The contributions to the LSA and the RSA are taxed now which gives the average "Joe" no incentive to save in these accounts.   The ERSA contains to provision for the company to contribute to these plans and help pay for the retirement costs of the workers unless they are choosing "Safe Harbor" rules.   It provides for no investment guidance for the workers to help the understand their investment choices and make wise decisions.  

About the only good item the proposal contains is the elimination of cross tested plans which has always been a way to get around funding employee's retirement at the same level as owners.   Cross tested plans have made it possible to give owners full retirement funding and the younger less paid workers very little retirement funding.   The elimination of these types of plans should benefit the average worker especially if the RSA and LSAs go into effect to make it easier for owners to save outside of their company retirement plans.

Thank goodness this is only a proposal by the administration, who do not have the ability to create laws!   But I'm sure some enterprising Congressman or Congresswoman will try to add these items to their pension reform bills.

I think the proposal ignores the real issues facing retirement planning.

The proposal however, will relieve many small employers of the burden inherent in sponsoring a retirement plan.

Once again, the burden to save for retirement is shifted even more so on the individual.

Lets go with (e) at this time; who knows enough about the proposal to be able to explain it to already concerned employees.   Without a better understanding of the proposal its hard to determine any potential impact it might have on the employment relationship.   My prediction is this particular piece of legislation wil receive the most intense scrutiny of any other proposed budget item before/if its enacted.   In the meantime, keep the surveys coming.

(c) ignoring the real problems of retirement savings.

ERSA's are nothing more than a 401(k) name change.   One could make 401(k)'s much simpler by eliminating many of the complexities in the law -definition of compensation, nondiscrimination testing, top-heavy rules, etc.   They don't need a whole new type of retirement plan to accomplish that.

But the real problem with retirement savings in the U.S. is that there isn't enough.   In 10 years or so, when the generation without pension plans, that counted on their 401k savings, begin to retire, only then will society wake up to the reality that it isn't enough.

For 20 years, the burden of retirement funding has been slowly shifting from employers to workers, and it will continue.   Until the Administration and Congress realize that it must offer greater incentives to the individual saver (How about a Roth 401k where the contributions are tax deferred and distributions after age 591/2 are tax-free?) and the plan sponsor (simplified administration, higher contribution and deduction limits, etc.), the problem will continue to grow.   And, as it does, the only outlet will be on social programs for the elderly - Social Security, Medicaid, and Medicare.

As the ad said, "You can pay me now, or pay me later."

In reply to your survey question:   I have to answer 'B -- a step in the right direction.'    It's vitally important that someone (the gov't?) make the processes, administration and testing simpler in order to make these savings programs easier on everyone.

Although I am no longer a Plan Sponsor, I can relate to how hard all those Plan Sponsors are working out there....it's truly a full-time job just to keep these plans in compliance!

Personally...I am VERY interested in the proposed LSA's (Lifetime Savings Accounts) that Mr. Bush is proposing.   In essence, passbook savings with no withdrawal restrictions and no taxable earnings...works for me!!!   The only down-side to this program is the annual limit of

$7,500 in savings.

I believe the public is painfully aware and better educated about the requirement for retirement savings these days...certainly much better educated than I was 25 years ago.   I feel that it is the government's duty to allow us to save as much as we want without having the burden of

future taxation hanging over us.   I applauded the Roth's when they came into being, and I applaud these proposals...as far as they go.

For retirement and college funding purposes only:   How about pre-tax savings and NO TAXATION at the other end?!?!?  

I think we'd see a great increase in savings then!!

Thanks for letting me state my peace!

I say (d) too much for the wrong people, mainly because after contributing $7,500 to an LSA and $7,500 to an RSA, the only ones who will have enough income left to contribute to ERSA's will be the high income folks.

Just what the doctor ordered.

The administrative costs for 401k plans has gotten to be excessive.   The new plans will help my firm set up hundreds of new accounts with several of our association clients with the challenges of multiple employer plans.   The LSA and RMA systems will add additional flexibility and fit nicely with the pending MAJOR Tax Reform plans like HR 25 that will soon become known.   We need to abolish the current Marxian tax code and replace it with a system like the NRST which fits our Constitutional guidelines.   This will also create the greatest savings and investment boom in history.

I notice that the proposed budget for 2004 contains spending of $2.2 TRILLION.   In the first 186 years of this nation's existence the TOTAL expenditure was only 275 BILLION.   Spending is way out of control and the financial, economic, business and political literacy of the citizens is deplorable.

More tax deferment for those already well off - hence more savings for retirement.

Nothing in it for those in modest income brackets (less than say $80k total household income).   These folks will not be able to put any more away than they currently do - for the most part these folks don't max out on the current limits, so raising the ceiling just makes it seem all the further away for them.

None of the budget proposal - indeed nothing form this Bush administration - is thoughtfully planned for the baby-boom retirement now in sight on the horizon.

What is needed is some kind of small business tax break for those employers who contribute matching - in cash - to an employee's DC account.

Here are random thoughts on the proposed changes.   I'm fresh off doing hundreds of employee enrollment meetings for a variety of companies.   I talk about the new $12,000 limit for 2003 and mostly get snickers and giggles from the audience.   Only the highly compensated individuals are able to meet those limits.   When I talk about the low savers credit on this year's tax return, the room becomes interested as people scratch down the directions and ask more questions.   This is where most of the participants I deal with are centered.

Do I have the wrong client base, full of poor-to-middle class employees that can't take advantage?   (better keep this one private).

Do I live in the wrong state (FL) where the only reason our unemployment numbers are so low is that it takes 2 jobs to make the living wage?

If I have the "typical" company and Florida is more like other states than I think, only 5% of the population will benefit from these new limits.   Changes in discrimination rules will only benefit the high comp individuals too.   They may benefit the small business owner by allowing him/her to save more (which may in fact be the only good thing about the new accounts).

Regarding the tax-free growth of the personal retirement accounts?   These too will only benefit the highly comped individuals.   Low-salaried employees don't save unless it's easy (payroll deduction) and they don't keep the money in the savings accounts unless they are forced.   My guess is that these will be popular until Xmas time when most use them as the old Xmas club accounts.   Brokers selling B shares will be the real beneficiaries of these accounts.

I'd rather see a boost in the low income savers credit.  

My comments are only my own, not necessarily of my company.

Thanks for posing the question.

(f)   another new direction that changes what we have been doing and complicates things.   The new savings accounts are a way to save, but changing directions every year is cumbersome and complicated for participants.   The finance industry seems to be the winner.

a.  Greatly simplifies everyone's life!!!

The safe harbor 401(k) provisions have provided much need relief to plan sponsors.   The government still needs to develop a national retirement income policy and provide targeted incentives to encourage savings. Just making retirement saving easy is not a policy.   This will only benefit those who already recognize the need.  

b - a step in the right direction.   Eliminating the AGI limits is definitely a needed change!

d- they always say they are trying to help the "little guy", but does it really?   If a small employer can put away $15,000 outside of a plan, why would they bother to have one and all the administrative headaches that go along with one?   But, I will say "Hallelujah!" if they can actually get top heavy repealed - which is already pretty useless since no one had tracked inservice distributions for the past 5 years!!!!

(e) - too soon to tell as these things tend to get lost, ignored, revised, revisited, rewritten, regurgitated, and debated before we have a clearer picture . . .but I could be wrong.   It certainly wouldn't be the first time.

I believe the President's proposal is "just what the doctor ordered" to take the mystery out of providing a reasonable retirement plan through worksite savings.   The real driver in accumulating retirement funds for the "little guy" is employer supported worksite education about retirement savings, the convenience of payroll deduction, and pre-tax accumulation.   This proposal will be opposed by those who thrive on fees developed in servicing plans with exotic plan designs, by those whose service is made necessary by compiling unwanted government forms, by those who can not provide a cost competitive retirement account, and by those who see anything that might do anything good for highly compensated folks as a call to class warfare.  

  Let's make worksite retirement savings defined contribution plans work through simplification.  

C) Ignoring the real retirement issues. I see these issues directly relating to the general welfare of the U.S. now and in the future:  

• providing a new regulatory framework to deal with the need for phased retirement, and removing disincentives for a graying America to continue working   (e.g.: getting rid of taxes on social security benefits),
• shoring up the social security program for future generations without risky and conflict laden privatization,  
• preventing short term fiscal deficits from leading to high inflation in the future,
• giving employers incentives to provide for retiree health coverage
• expanding availability of long term care insurance coverage via tax credits and employer plan incentives
• providing a relatively stable legal and regulatory environment conducive to long term planning by individuals
• expanding the allowable uses of technology and automation in benefit plan administration to increase efficiency

The proposal's weaknesses are as follows:

most people can do Roth IRAs now.   Expanding the tax break even further with RSAs probably won't do much except for those with high incomes currently excluded from contributing to a Roth IRA and those who hit the Roth IRA contribution ceiling currently.    There aren't that many people in either category. It appears that except for a well informed and relatively wealthy minority, most people just don't get around to saving on their own without someone to help them do it (like employer plans where payroll deduction is relatively painless, the employer gives incentives such as matching contributions, and promotes the value of the plans).    The government seems to be poor at promoting IRAs and educating the public about the value of IRAs and probably won't do any better with RSAs.

The changes to employer plans may not be significant enough to make a difference for most savers but will continue to make it difficult for plan sponsors and plan service providers who are just getting getting used to the changes to their plans enacted in the last few years under GUST and EGTRRA.   I say enough with these minor changes that tinker with the tax rules every year and mostly affect some tiny wealthy minority. Either enact some worthwhile sweeping reform that lasts a few years, helps the broad majority and is sustainable over an entire business cycle, or don't do anything at all. The nation's retirement and labor policy (and not temporary fiscal policy measures as a poorly timed substitute for an expansionary monetary policy) should be the driving force behind retirement plan changes.  

C. at a time when most people are worried about their retirement plan and the stock market as a whole the Administration springs this on the plan sponsors right after EGTRRA.   What is the real deal here who does this really help for retirement?  

Re: survey, It is too soon to tell, the devil is in the details.

While the concept of "simplifying" anything related to tax law is commendable, of course this is not a simplification.

Tens of thousands of small employers have already spent a lot of money designing, establishing and working with their 401(k) plans, plans they designed to work for them under the current laws, plans they just spent more money on to restate for GUST, EGTRRA, etc.   This proposal just throws all that out and will require them to spend more money to get often less than they have now.   I do like the idea of eliminating the artificial distinctions between 401(a), 403(b), and 457 plans.   Having just one type of plan for all types of employers makes some sense.   However, the individuals who have 403(b) and 401(k) opportunities (teachers and health care workers -

not the rich, usually) and can double up on their deferrals will be hurt by this, too.  

The problem in this country with people not saving is not the complexity of plans, but the unwillingness or inability on the part of the people to save. Employers who want to can set up very simple types of plans with little expense now.   Even the ERSA is going to cost something to set up and administer.

I can see offering this as a future optional approach to employers who want to use it, but frankly, the government should just leave well enough alone for now on the pension front - the constant changes are what is making this area so complex and expensive for employers.   It seems that just as we begin to get the rules figured out, they want to change them!  

Enough already!

Thanks for the opportunity to vent.   We are going to let the PSCA and other professional organizations know how we feel, too.   Our firm is a TPA for retirement plans.

My vote - answers (C) and (D)

The proposal's expansion of individual savings opportunities is a farce.   Most workers are not maximizing their current savings opportunities. People will generally NOT save on their own; and even if they do, they'll end up spending it on something other than retirement.   Retirement savings in employer sponsored plans already has serious 'leakage' problems.   "Portability" translates to employees taking their retirement plan account in a lump sum whenever they change jobs and spending it.   To ensure real retirement security for the masses, the system needs tightened up, not loosened.

Further, small business owners will have no incentive to establish a retirement plan under this proposal.   They will save on their own, but their workers won't.   Moderate income workers are much more likely to save in employer sponsored retirement plans like 401k plans.   On their own, they will not do it;   they don't think they can afford it, they procrastinate getting started.   So this proposal is not only benefiting the wrong people, it is not benefiting the people who need help.

because politicians and lobbyists are involved.   I do wonder if ERSA is the illegitimate love child of ERISA and IRS?

The administration is ignoring the real problems of saving for retirement.   While the proposal conforms to an "ivory tower" model of consumption-based tax policy, it ignores the reality of who will be able to take advantage of these changes (which will certainly not be those with low to moderate income). Great theory, but lousy policy for the country as a whole.

The proposed legislation would result in the termination by most small employers of their defined contribution plans. Employers are willing to "give" their employees 3 to 5% of compensation providing they have the advantages of the safe harbor and tiered allocation approaches.   Absent

that, there will be little or no incentive for employers to sponsor plans. A very large segment of people in the pension industry will become unemployed and the flow of dollars to 401(k)/profit sharing plans into the stock market through mutual fund investment companies will basically dry up. Realistically, the average employee won't take advantage of the proposed type of plans, which will lead to an even greater dependency on the Social Security system.   The whole thing is a very bad idea!

(d) AND (c).  

Too much for the wrong people.   Really, no provisions that I've seen are going to get the workers who aren't yet saving to begin participating in the new ERSAs.   And the higher-paid people, no longer shackled by non-discrim limits (or higher limits) will pour it in.   Then take away the current tax-deductibility of an IRA contribution - where's the incentive?

So, all contributions to RSAs become taxable, and conversions of IRAs to RSAs become taxable - it looks like a way to increase tax income.   If the RSAs really become a Roth-lookalike, who benefits when there are no MRDs? Answer, the wealthy who can then pass on the RSA to their beneficiary tax-free.   Is this the correct way to solve the real problems of retirement savings?   NO.

I know this will lower the expense of the plan for the plan sponsor and reduce some administrative work for them, but it does not really address the problem of retirement savings.   The lower paid employees have no new incentive to participate.   The higher paid positions would save more money to lower their taxes.    I believe small business owners who could afford to save would establish new plans for there companies.

(d)   At this point, there is not enough there for the average employee to see the benefits versus the cost of communicating the change.

I think the RSA and LSA components of the plan will be great but the ERSA component will just exacerbate the social disaster that will hit us in a few decades when hoards of people start retiring with no defined benefit pension and very limited 401(k) accounts.   Relaxation of the nondiscrimination rules as proposed for ERSAs will result in even less retirement savings for middle and lower class taxpayers and will make an already bad situation worse.

I know I am slightly late but my answer is c.   This looks like a small step towards the eventual goal of privatizing social security whereby each person would have one account for all of their retirement needs and it would be each person's responsibility; however, there are so many loopholes on how people can touch this money prior to retirement and many people have legitimate needs to touch this money because government perhaps is not fulfilling other needs (e.g., healthcare) and thus people who are not good at managing their money will use or have very little left when they finally reach their retirement because they either already used it, did not save enough, or saved in the poor performing vehicles.

In a recent casual phone conversation with some small employers that currently do not have retirement plans the new proposals were explained and a question posed,,,in light of theses changes would you start a retirement plan for your employees. The answer was no. There is no need to now they can save individually $7,500.00 per year.

Perhaps President bush means well, But, has he surveyed small employers or any employers for that matter?????