President Clinton has proposed a program designed to help the more than 20 million Americans who work for small companies without pension benefits build a retirement nest egg. The Secure Money Annuity or Retirement Trust proposal -- known as SMART -- by Mr. Clinton is designed for companies with fewer than 100 workers and guarantees the employees a minimum annual benefit upon retirement.
But while President Clinton has both logic and moral imperative on his side, there may be some negative side effects.
At most small companies, human and financial resources are limited. In most cases, the person who would end up being responsible is the one in charge of the firm -- the very person with the least amount of time for new programs. The head of a small company can best help the firm's workers by focusing on running the business so it remains profitable, not on administering employee benefits.
Indeed, legislation embodied in the SMART plan is too complex for most small employers. Our experience shows that most small businesses don't have the benefits expertise a large company has. Small firms don't have staffs who can review, understand and implement the proposed retirement plan legislation.
LONG-TERM COST DRAIN
These complexities will only add to the anticipated average startup cost of a retirement plan of $500 to $5,000. Other costs will remain ongoing and pose a long-term drain on the company's resources.
Contributions under the SMART plan are funded solely by the employer. SMART plans for business owners are structured as a defined benefit plan. This means business owners take on substantially more financial liability than under a defined contribution plan. Administrative costs such as statements and record-keeping also remain the employers' responsibility.
President Clinton's SMART plan raises significant issues of legal liability. That's because funding for a SMART plan would be provided either through an annuity or a trust. In either case, employers would be liable to make up the difference between the amount in an employee's account and a minimum guaranteed benefit when the employee retires.
This element appears completely unworkable. Many small companies go out of business within five years, raising the question of how to go after these employers for additional benefits if they have sold or liquidated the firm or filed for bankruptcy.
HIGH FAILURE RATE
The high failure rate for small companies exacerbates another weakness in the proposal. The number of firms that go out of business each year could potentially impact the Pension Benefit Guaranty Corp. and cause increased premiums to all plan sponsors. This could be an explosive cost to the entire retirement system.
President Clinton proposes to offset some of this burden with employer tax credits. But these credits won't adequately compensate small businesses for their time, costs and exposure to liability.
STEP IN RIGHT DIRECTION
To be sure, pension policies for small businesses is a serious issue that needs to be addressed. The SMART plan is a step in the right direction. But small businesses need a program that is less complex, that shelters them from liability and that helps educate employees on how they can use individual retirement accounts, or IRAs, to avoid becoming overly reliant on Social Security.
Social Security can no longer be expected to bridge the gap. No less an authority than Federal Reserve Board Chairman Alan Greenspan has warned of financial problems that could beset Social Security as the Baby Boom generation begins to retire early in the next century. In testimony before the U.S. Senate last year, Mr. Greenspan noted that by 2014, annual Social Security costs are expected to exceed tax receipts, with subsequent deficits projected to deplete the system by 2031.
Next year, the Clinton administration is expected to propose a sweeping overhaul of the Social Security System. Wells Fargo wholeheartedly endorses the effort to save Social Security and make it viable for the next generation.
At first blush, the president's so-called SMART plan seems to attack a problem that worries many working Americans who are under-prepared for retirement. Consider that only one in five Americans who work for companies with fewer than 100 employees have a pension plan, compared with 62% of those at firms with more than 100 workers, according to the Clinton administration.
BIG PAYOFF POTENTIAL
Helping small business could have enormous payoffs: This sector represents the biggest engine of job growth in the United States. These are not just entry-level positions in restaurants and retail shops.
Indeed, technological change is exploding, creating new efficiencies in computers, software and telecommunications, many of which are being driven by advances in small technology start-ups.
But the SMART plan, when examined closely, may not have the expected payoff either for service providers or most importantly for small businesses and their employees.