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Details Given on New Plans to Aid Saving

By MARY WILLIAMS WALSH

NY Times, February 1, 2003

The Bush administration today unveiled its plan to create two new types of savings accounts that would allow a couple to save as much as $30,000 a year in funds that could be withdrawn, with any investment gains, free of taxes.

Everyone would be able to contribute to the plans, with no limitations based on age or income.

For people with plenty of money, the accounts would offer powerful new ways to build wealth. A person could contribute up to $7,500 a year to a Lifetime Savings Account, which would generate investment income tax free, then use the money for any purpose, not just buying a home or paying for education. Withdrawals could be made at any age and would also be tax free.

That same person could also contribute up to $7,500 a year to a Retirement Savings Account, which would replace today's individual retirement accounts and Roth accounts, among others. After the saver reached age 58, withdrawals would be free from taxes and penalties. The saver's spouse could set aside those amounts each year, a total of $15,000, in such accounts.

The accounts "make saving simple for everyone and for every purpose," stated Pamela F. Olson, the assistant Treasury secretary for tax policy, in a department statement. "No longer will individuals have to worry about the confusing alphabet soup of six different savings accounts."

Though the proposals are described as simplifying the mix of saving plans, choosing the best way to harness the new plans would still be a complicated matter. .

"This is not going to be simplified, believe me," said Steven G. Lockwood, president of Lockwood Pension Services and the author of "Individual Retirement Account Answer Book."

"But it's all good news," he said. "People will walk away from this with more money."

Some of the complexity would arise as savers make decisions about how to invest their money in the new accounts — decisions with new twists if the administration's plan to make dividends tax exempt goes forward.

In addition, people would have to compare the merits of saving through one of the new individual accounts with those of any retirement account they are offered at work. The Bush administration is also proposing to reshape work-based retirement plans like the 401(k) account, calling the successor plans Employer Retirement Savings Accounts. The advantages and disadvantages would vary depending on each person's age, goals, tax bracket and other factors.

Like many other financial analysts, Mr. Lockwood noted that the benefits of the new accounts would flow only to those who have money to save. The accounts would have little effect on people who live from paycheck to paycheck.

Indeed, some benefits consultants warned that the new accounts and proposed rule changes on accounts sponsored by employers could combine to eliminate the incentives for some companies to offer retirement savings plans to their workers.

"If you're a small-business employee, what this could potentially mean is your employer will no longer offer a program for you," said Brian H. Graff, executive director of the American Society of Pension Actuaries.

The new accounts also appear to threaten certain existing financial services, because they would damp public enthusiasm for some investment instruments, like annuities and education savings accounts.

The proposals could provide a one-time increase in federal tax revenues. The new plans have incentives to encourage savers to withdraw money from their old individual savings accounts, pay the applicable taxes and put the funds into the new accounts. People who convert from I.R.A.'s in the first year, for example, will be allowed to stretch the tax payments over four years.

When those people retire, though, they will be able to receive income free from taxes, meaning less federal revenue in later years.

For employers, the Bush administration said it hoped to eliminate many of the rules now imposed on the structure of retirement accounts. The Treasury said it also wanted to reduce the number of work-based plans, consolidating such vehicles as the 401(k) plan, the Simple 401(k) plan, and the governmental 457 plan into a single format, the Employer Retirement Savings Account.

Employees eligible for the Employer Retirement Savings Account at work could contribute the amounts that they may now put into their 401(k) plans: $12,000 a year if they are younger than 50, and $14,000 a year if they are 50 or older. These maximum amounts would increase in the coming years, just as they do on 401(k) amounts.

The new consolidated account would be similar to the 401(k) account in many other ways. Companies would deduct workers' contributions from their paychecks before taxes, employers could offer to match worker contributions, and savers would pay taxes on money they withdrew after retirement.

Administration officials said that they believed that the variety of work-based accounts confuses employees, and the rules discourage companies from offering such plans.

"This is especially true of small employers who together employ 4 out of every 10 American workers," Ms. Olson said. "It's one important reason why only 50 percent of working Americans have any pension plan at all."

She said she believed that once the rules were stripped away, more companies would offer retirement savings programs to their workers, ultimately improving the financial well-being of elderly Americans.

Employee-benefits specialists said, however, that they feared that the administration's package might have the opposite effect.

This is because some rules are intended to ensure that senior officials of companies — particularly small companies — do not set up retirement plans for their workers and direct most of the benefits to themselves, creating abusive tax shelters.

One such provision is the "top heavy" rule. It requires that when a small company creates a retirement plan that grants most of its benefits to top officials, the plan must also guarantee that the lowest-paid workers get contributions of at least 3 percent of their pay.

Another provision requires that companies that set up Simple 401(k) plans for their workers must offer to match 3 percent or more of employee contributions.

These rules have been criticized by companies because they make small businesses do considerable paperwork relative to the size of the benefits they bestow on low-income workers. Those workers might prefer cash to the small retirement benefit they receive, in any case.

The administration is proposing to repeal both rules, along with similar regulations that are meant to distribute the benefits of retirement plans more equally among workers and managers.

Mr. Graff said he was not convinced that large numbers of employers would set up Employer Retirement Savings Accounts for their companies if they no longer had to adhere to complex rules. He said that since small-business owners and their spouses would be able to put away $30,000 each year in the other new tax-advantaged accounts, they would have little need to create tax-advantaged savings plans at work.

"It's the rank and file who are going to lose out of the opportunity to get a matching contribution," he said, adding that millions of employees now participate in the Simple plans, which would be eliminated. Studies show that low-wage workers are unlikely to save anything at all for their retirement unless an employer deducts the money from their paychecks.

For savers whose employers now offer 401(k) accounts with matching money, Mr. Lockwood said the best strategy would be, first of all, to keep paying into the same accounts if the proposals are enacted. These accounts would automatically become Employer Retirement Savings Accounts, and while the new individual accounts would offer attractive features, he said, even they do not measure up to the value of matching payments from an employer.

"It's Pension 101," he said. "You never turn your back on a match."

After that, any savers with still more money to set aside could turn to the individual accounts. Financial planners said that converting money from the older savings accounts to the new ones would probably pay off, even though it would mean paying taxes in the process.

"That would be an individual decision depending on your age, how soon you want access to the money, what you want to invest in, your future tax bracket," Mr. Lockwood said. "You'd have to look at a lot of different factors."

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