Pension Bills Could Give Funds a Boost
May 17, 1999
A raft of Congressional legislation aimed at boosting savings for retirement by Americans has captured the interest of mutual fund companies who see the changes as a potential boon to their assets.
Most of the measures call for increases in the allowable amounts workers can put into retirement plans annually. The measures are also aimed at making setting up plans more attractive to businesses with less than 100 employees, a large and fertile market hungry for the right product.
Two of the bills with the highest visibility are bipartisan measures filed in the Senate by Senate Finance Committee chairman William Roth (R-Del.) and committee colleague Max Baucus (D-Mont.) In the House, the measures were filed by Ways and Means Committee members Rob Portman (R-Ohio) and Benjamin L. Cardin (D-Md.)
Among the provisions in Roth-Baucus are an increase in the annual limit on IRA contributions from $2000 to $5000, elimination of all income caps for IRAs and an increase in the income limit on converting a traditional IRA to a Roth IRA from $100,000 to $1 million.
The proposed change in the Roth conversion limit is an important one to many investors, said Matthew Mintzer, senior vice president and director of retirement products for Putnam Investments of Boston.
"In our launching of the Roth IRA, we found a lot of frustration coming from investors about that conversion cap," he said. "I think there's a pent-up demand for conversion to Roth by folks with IRAs over $100,000."
The Senate bill would also increase the annual contribution limits to 401(k) and 403(b) plans from $10,000 to $15,000 and to SIMPLE plans from $8000 to $12,000. In addition, Roth-Baucus would eliminate the 25 percent limit on combined contributions to a defined contribution plan. Now the combined contribution to a plan is limited to $30,000 or 25 percent of an employee's pay - whichever is lower.
The measure would also create "catch-up" contribution limits to the various plans, which would allow workers 50 and older to put away 50 percent more money in their plans than is currently allowed.
The House bill includes similar proposed changes in contribution limits and it suggests modifying the "top-heavy" rules for setting up a plan, rules that have been cited as major deterrents to small businesses setting up plans. It also proposes creating salary-reduction only SIMPLE plans for small employers setting up plans for the first time.
Most companies with more than 100 employees have some type of plan, according to David Wray, president of the Profit Sharing/401(K) Council Of America in Chicago. But, only 20 percent to 30 percent of companies with fewer than 100 employees have plans, he said.
"There are no economies of scale down there and complexity is a much bigger issue," Wray said.
The "top-heavy" rules are a chief culprit in discouraging small companies from starting plans, said Wray.
"They are extremely complex and onerous," Wray said of the rules. They mandate that if 60 percent or more of the assets in a plan belong to highly-compensated employees, the employer must make a three percent contribution to the plan, he said.
"Small companies have very uneven cash flows, and many times a CEO is chasing accounts receivable to make a payroll," Wray said. "If you require a company to make a contribution, it won't create a plan because it's afraid that requirement could force the company into bankruptcy."
"If these companies have to write a check at an inappropriate time, they're in trouble and they will not put in a plan that forces them to do that," he said. "That's the number one reason that small companies don't have plans."
"Starting to defrost the contribution limits on pension plans should take the chill off our national savings rate," said John J. McCormack, Jr., president of the world's largest private pension system, TIAA-CREF, at a Senate hearing on Roth-Baucus.
A good percentage of any increased savings are expected to become mutual fund assets - if recent history is any indicator.
When Congress created the Roth IRA to stimulate savings, the public responded. In the first three months of the program, three percent of U.S. households had a Roth IRA, said Matthew P. Fink, president of the Investment Company Institute, in testimony before Congress. Moreover, 30 percent of those accounts were opened up by first-time IRA savers. In addition, activity in traditional IRAs in 1998 increased 12 percent, at least partially because of the intensive educational campaigns mounted by financial institutions after the launch of Roth, Fink said.
"The Roth IRA generated a lot of new interest and a lot of new savings," said Dennis Simmons, principal manager of ERISA legal at the Vanguard Group of Valley Forge, Pa. If the contribution limits to plans were increased, he would expect a spike in savings to occur, he said.
"Anything that generates excitement around savings encourages people to save more," noted John Doyle, vice president of marketing and communications for T. Rowe Price in Baltimore. "That's good for the mutual fund companies, and it's good for individuals as well."
Beyond building asset levels at mutual fund companies, the retirement proposals before Congress also may go some way in relieving the pressure on Washington to privatize the Social Security System.
"You read through these bills and you almost get the sense that this, in effect is the privatization of Social Security, maybe more so than legislating it via some bill," Mintzer said. "It indirectly takes care of the issue because you allow Americans to save more themselves and relieve strain on the system by letting the individual have more control over their own destiny."