One thing that is already different from last year is the lowering of the annual contribution limits on the LSAs and RSAs from $7,500 to $5,000. Last year's proposal would have allowed business owners to set up LSA and RSA accounts for their spouses, children and grandchildren, which potentially could have been used to squirrel away significant sums in tax-free accounts. The benefits could have been so rich, it was argued, that small business owners would have no incentive to establish ERSA plans for their employees. It was one of the crucial issues in the debate over the proposal last year, because a minority of small business owners-less than 30% according to some studies-currently offer 401(k) or other retirement plans. In response to that criticism, the proposal was changed to allow only for the creation of an LSA or RSA for a spouse.
"The real problem last year is that there was an extremely high likelihood, if they passed it in the form it was, of having a severely negative impact on small businesses starting retirement plans," says Rick Meigs, founder and president of 401khelpcenter.com.
The White House may also adopt a different strategy to avoid an all-or-nothing battle in Congress. Thomas Foster, The Hartford's national spokesman for qualified retirement plans, says it appears that the proposals will be packaged as three separate pieces of legislation instead of one. The plan's components-LSAs, RSAs and ERSAs-would be dealt with individually in their own legislative proposals. "Each one can stand on their own merit," Foster days.
It's also likely, he says, that the push for adoption will be in 2005 rather than this year, meaning the results of the presidential election will weigh heavily in the outcome. Even with those changes, there are those who still expect a contentious debate over the proposals.
One issue that remains unclear, skeptics say, is who exactly will benefit from the new plans. The investors who will reap the most rewards, it is generally agreed, are high-income investors who are looking for extra places to put retirement savings on a tax-advantaged basis. But critics argue the proposals will do little for the overwhelming majority of Americans who fail to save adequately for retirement.
Some studies, for example, have indicated that as little as 4% of Americans actually make the maximum allowable contributions to their 401(k) plans each year. Matt Gnabasik, managing director of the Blue Prairie Group, a human resources consulting firm in Chicago, notes that about 25% of those eligible for employer-sponsored retirement plans don't even participate.
He sees little in the current proposal that would encourage further participation, he says. "If a small business employer wants to set up a retirement plan now, it's pretty easy," he says.
Meigs agrees, saying the proposal could go further by extending the tax credits available to businesses that set up such plans and making it easier for companies to institute automatic retirement plan enrollment.
Foster says automatic enrollment, where 401(k) deductions of about 2% or 3% are made from an employee's paycheck without his or her prior consent, has been done successfully by companies such as McDonald's. The way the plan typically works is that an employee can opt out at any time. "You are in the plan unless you march into human resources and insist you want out of the plan," Gnabasik says.
There's also another problem that the new accounts don't address, according to Lou Stanasolovich, CEO and president of Legend Financial Advisors in Pittsburgh: inadequate investment choices.