PRESIDENT'S PROPOSALS WILL REDUCE THE APPEAL OF EMPLOYER PLANS

Retirement saving by lower and moderate-income workers will likely diminish

WASHINGTON, DC (February 5, 2003) - The Profit Sharing 401(k) Council of America (PSCA) applauds the administration for raising the public dialog on the critical issue of the adequacy of retirement savings for Americans. President Bush’s proposed changes for employer-provided plans provide much needed relief under the nondiscrimination rules and repeal the onerous top heavy rules. His proposals to remove the confusion surrounding IRAs are also beneficial. Without doubt, these provisions are intended to help American workers prepare for their long-anticipated retirements. Unfortunately, we believe that unintended consequences will interfere with these laudable goals.

PSCA believes that any proposal affecting retirement savings should address four questions. Will overall retirement savings increase? How will the at-risk population of lower paid workers be affected? Will leakage of retirement savings increase? Will non-savers be induced to save? While we are confident the administration believes their proposals will result in affirmative responses to these questions, we must disagree.

The markedly higher annual contribution limits in the new Lifetime Savings Accounts (LSAs) and Retirement Savings Accounts (RSAs), and the tax advantages of the president's proposal regarding the taxation of dividends, provide the same or even better benefits than are provided most participants in employer-provided plans. In this new environment many employers, particularly small business owners, will decide not to provide a retirement plan for their employees. 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. Many employees will redirect their retirement savings to LSAs and use their accumulations for non-retirement purposes. To the extent that some employers continue to offer 401(k) plans, it may be more difficult for these plans to pass the nondiscrimination tests, even as changed in the proposal. Many employees offered a 401(k) will choose instead to save in LSAs, where they will have immediate and unrestricted access to their savings.

"The proposed changes significantly erode the tax code incentives that encourage employers to accept the fiduciary obligation and expense that come with offering a retirement plan," said PSCA president David Wray. "The current approach links the availability of tax benefits for decision makers and better off workers with the retirement savings of lower paid employees. This linkage requires that employers incentivize lower paid workers to save for retirement by using expensive matching contributions as well as conducting aggressive educational campaigns." Fewer Americans will enjoy a financially secure retirement if this employer-employee partnership is discontinued.

We look forward to working with the President to improve his proposal. With adjustments, the proposal can expand opportunities for all savers and still preserve the tax treatment incentives, relative to other savings programs, for employer-provided plans that have created today's broad investor class.

The Profit Sharing/401(k) Council of America (PSCA), a national non-profit association of 1,200 companies and their 6 million employees, advocates increased retirement security through profit sharing, 401(k) and related defined contribution programs to federal policymakers and makes practical assistance with profit sharing and 401(k) plan design, administration, investment, compliance and communication available to its members. PSCA, established in 1947, is based on the principle that “defined contribution partnership in the workplace fits today’s reality.” PSCA's services are tailored to meet the needs of both large and small companies with members ranging in size from Fortune 100 firms to small, entrepreneurial businesses.