Defined contribution plan sponsors will escape major competition for retirement savings from any of the three proposals before Congress to enhance IRAs, pension experts predict.
But the proposals could raise some companies' costs of providing 401(k) plans by spurring them to match employee contributions if they don't already do so, or to make more generous matches.
And, experts concede there could be some small movement into the new individual retirement accounts in lieu of 401(k) plan contributions, especially by lower paid employees who want easier access to their assets.
(But a survey by Hewitt Associates, Lincolnshire, Ill., showed about three-quarters of employers already let workers borrow money from their 401(k) plans for large outlays.)
Also, consultants say employers might need to step up communication efforts to increase awareness of the advantages of their 401(k) plans to counter an anticipated marketing avalanche for IRA account business from mutual fund companies and banks as they pursue a new market niche.
Of the three IRA proposals under consideration in Congress, the House Republicans' expanded IRA proposal has made the most headway.
The "American Dream Savings Account," a provision in the Contract with America, passed the powerful House Ways and Means Committee March 14 by a 21-14 party vote without any amendments. The full House is expected to vote on it by the first week of April.
Even though some powerful senators - notably Bob Packwood, R-Ore., the head of the Senate Finance Committee - have said employer-sponsored retirement plans have shown to be a more credible way of boosting the nation's flagging savings rate, lawmakers' strong interest in creating a new tax-advantaged savings vehicle virtually guarantees passage of some form of enhanced IRA legislation this year, Washington observers say.
Yet consultants overwhelmingly agree qualified plans provide a superior retirement savings vehicle.
"A 401(k) plan is almost always a better deal for the participant. The combination of the employer match on an employee's contributions, the fact that a professional has done the plan design and has shopped for the best managers to manage the investment options, and the sheer convenience of savings through a payroll deduction make an employer-sponsored 401(k) plan a much better deal for workers. And the employer is the only party out there that isn't trying to make money off the employee's account assets. There is not a profit motivation," said Steve G. Vernon, retirement practice director for The Wyatt Co. in Los Angeles.
But, employers will have to actively educate workers of the advantages of 401(k) plans over IRAs.
"You expand IRAs and you have expanded them in competition with 401(k) plans," said Judy Mazo, director of research at The Segal Co., New York.
The potential drop in employee contributions could, in turn, cause employer-sponsored 401(k) plans to possibly fail non-discrimination tests unless higher-paid employees cut back on their contributions too.
For this reason, some consultants favor a congressional move to standardize the withdrawal provisions of 401(k) plans, to put them on a par with those of the IRA, such as that contained in the "Super IRA" legislation (S.R. 12) introduced in the Senate this year by Sen. William Roth, R-Del., and Sen. John Breaux, D-La.
"There has to be consistency in the rules for withdrawals of 401(k) plan and IRA assets, or you could be creating an unequal playing field between the two for some employees," said Larry Sher, partner and chief actuary at Kwasha Lipton, Fort Lee, N.J.
More important to the level of employee participation in 401(k) plans is the extent of employer matches. Most employers (85%) already offer some match, according to Hewitt's survey.
Employers generally contribute 50 cents for every dollar employees put in, up to 6% of their salary, Hewitt found.
Moreover, Hewitt's survey showed average participation in plans offering a match of any level was 77%, compared with an average participation rate of 59% for plans without a match.
"This will be a definite incentive for employers that don't offer matches to offer them, and for employers that offer modest matches to think about increasing them," said Henry Saveth, a principal with A. Foster Higgins & Co. Inc., New York.
If any of the new IRA proposals is enacted, plan sponsors will have to strengthen their communication efforts, partly to temper the barrage of IRA advertising expected from the financial services industry.
"Congress will increase the potential size of the IRA pot tremendously if some form of enhanced IRA legislation is passed. Naturally, the banks and mutual funds will advertise heavily .*.*. Plan sponsors will have to deal with competition for assets," said Paul J. Yakoboski, a research associate at the Employee Benefit Research Institute, Washington.
David Wray, president of the Profit Sharing Council of America, Chicago, worries small companies could slow down efforts to set up 401(k) plans if enhanced IRA legislation is passed.
Some suggest the simplicity of the new IRAs - compared with the complexities of plan administration, company fiduciary liability questions, and the sheer time and expense of sponsoring a 401(k) plan - may deter small companies from establishing such plans.
"My guess is that an expanded and attractive IRA may be promoted as a substitute retirement vehicle for companies that would otherwise start a qualified plan when they reached a certain size," Mr. Wray said.
The House Republican IRA version has the best chance of passing because it would initially raise federal revenue, although it would be a money-loser over the long term. The other two versions would begin to drain the U.S. Treasury immediately.
The House Republican bill would allow all Americans to contribute up to $2,000 a year from after-tax income into the new American Dream Savings Accounts. Americans under 591/2 could withdraw the money tax-free after five years under certain circumstances, such as purchasing a first home, paying medical expenses, college tuition or nursing home policy premiums.
Withdrawals under these special circumstances before five years would be exempt from the 10% excise tax levied on early withdrawals, but the distribution would be taxed at regular rates.
No congressional action has been taken on the other two proposals - President Clinton's version, part of his 'Middle-Class Bill of Rights" offered in the proposed 1996 federal budget in late January, and the warmed-over version of a bill offered every session since 1986 by Sen. Roth Sen. and Breaux.
President Clinton's proposal would open IRAs to many more Americans and let them withdraw the money in those accounts penalty-free after five years under certain circumstances.
Individuals who make the early withdrawals would still have to pay income tax on any investment income.
President Clinton's plan would expand IRAs to individuals earning less than $70,000, or married couples earning up to $100,000 - twice the current caps.
The proposal also would link IRA contributions with employee contributions to 401(k) plans dollar for dollar, so employees who contribute the maximum amount to their 401(k) plans next year - about $9,500 - would not be able to put any money into IRAs. Conversely, Americans who tuck away $2,000 into an IRA would only be able to put in $7,500 into employer-sponsored 401(k) plans. The $2,000 cap on annual contributions and the salary cap limiting eligibility for IRAs would be adjusted for inflation.
The Roth-Breaux version differs from the president's proposal in that it would be available to all Americans, regardless of how much money they earn or if they already belong to company pension plans.
The Roth-Breaux proposal also would allow penalty-free early withdrawals from 401(k) and 403(b) plans for certain reasons.
Pension experts are disturbed by the linking of IRA contributions with employee contributions to 401(k) plans.
"It might be a dream for someone, but this aspect of the proposal will be a nightmare for a plan sponsor," said Wyatt's Mr. Vernon.