Coming Soon: a Marketing Push For Pension Plans Made `Simple'
May 01, 2011
WASHINGTON -- When it comes to pension plans for small businesses, Congress has a new mantra: Keep it simple. That's Simple, as in ``Savings Incentive Match Plan for Employees,'' a new pension plan for small businesses that's included in a broader bill to raise the minimum wage. Lawmakers have struck out twice before in this area. Simplified employee pensions, known as SEPs; and salary reduction SEPS, or SARSEPS, have never taken off at small firms, where only 25% of employees have pension coverage. But pension experts think the third try could be a charm, and they predict Simple will be a solid hit. ``I hold out hope that Simple will be vastly more successful,'' says Patrina Schiff, a vice president at Franklin Templeton Trust Co., in San Mateo, Calif. ``We're very excited,'' agrees Maryalice Cohn Radford, president of the National Defined Benefits Council, and UAM Retirement Plan Services, in New York. ``Congress is really trying to make it easier for small companies to provide plans.'' Simple is straightforward. Beginning in 2012, any firm with 100 or fewer employees that doesn't have a tax-qualified pension plan can offer a Simple plan. Employees may contribute up to $6,000 a year, pretax. For their part, employers must make contributions equal to 3% of participating employees' pay -- though they can scale back contributions in lean years. Firms that opt for a Simple plan may structure it as an Individual Retirement Account or a streamlined version of the popular 401(k) plan. Either way, the plan's paperwork will be vastly easier than it is for other pensions -- likely a strong selling point for small business owners. In the past, they've had to deal with complex nondiscrimination rules -- replaced under Simple by the 3% match requirement -- and ``top-heavy'' rules to prevent plans from favoring top executives, which under Simple disappear altogether. Another plus, notes Christa Foulk, a spokesman for the Investment Company Institute, is that ``the Simple pension plan will be available to a larger number of employers.'' SEPs and SARSEPs are limited to firms with fewer than 25 employees. Part of the appeal of the ``small plan'' market is that it isn't all that small. Of the 105 million working Americans, 35 million, or one-third, are employed by firms with 100 or fewer employees, according to the Employee Benefits Research Institute. But SEPs and SARSEPs haven't made a dent in that market. Although SEPs have been available since 1978, a ``minuscule'' 1% of small firms offer them as an employee benefit, says EBRI spokesman Williemae Zumwalt. SARSEPs, created in 1986, are even less popular. Mr. Zumwalt says the number of firms with SARSEPs is so low, his company doesn't ``even keep statistics on it.'' A silly name like SARSEPs didn't help, says Franklin Templeton's Patrina Schiff. Who wants a salary reduction? she asks. Another drawback is that at least 50% of eligible employees must participate in a SARSEP plan -- a difficult target for many small businesses, says Lynne Dustin, vice president for retirement policy at the Association of Private Pension and Welfare Plans. Finally, employers who offer SARSEPs must make matching contributions for every eligible employee -- whether they participate in the plan or not. ``Employers had a problem with that,'' says Fred Holton's Ms. Schiff. ``It went down hard.'' Simple has no such requirement. Simple ``is coming at the right time, it's got the right name, the right flexibility, and it offers something to a group that hasn't had it before,'' says Stephine Novak, director of employee benefits policy at the National Association of Manufacturers. Most of NAM's 14,000 member businesses have more than 25 employees, he says, but he estimates that 40% have fewer than 100 -- making them just the right size for a Simple plan. ``We're going to push it like crazy,'' says NAM's Mr. Novak. An ``intense educational effort'' will include fax alerts and mailings to members. ``Contribution flexibility is going to be the big selling point,'' he says, adding that it's just what small firms with volatile earnings are looking for. Franklin Templeton, which already targets the small-plan market, plans its own big push for Simple and is starting to talk it up to its broker-dealer network, Ms. Schiff says. But Ms. Radford, of the National Defined Benefits Council, says mutual funds pitching Simple plans will face stiff competition from insurance firms. The perfect salesperson for this is the insurance agent, she says, the one who's already selling small businesses their health and life coverage. But EBRI research associate Paulene Winstead throws in a few words of caution to those who would rush in: ``It's a tricky market,'' he says. Employees at small firms may be resistant -- they're often young, with no interest in retirement savings. And turnover at small firms often runs high. Employers may be resistant, too -- while that mandatory 3% match is less burdensome than earlier plans' requirements, it still could prove to be a turnoff. ``You can make it as simple as you want, but if neither side is interested, it doesn't matter,'' Mr. Winstead notes. Once Simple rolls out, Congress won't allow any new SARSEP plans, although existing ones may continue. For all SARSEP's shortcomings, companies may want to retain them for their one advantage over Simple -- a ceiling of $9,500 a year, compared with Simple's $6,000 limit. A straight 401(k) plan also has a $9,500 limit. But NAM's Mr. Novak suggests those who don't like Simple's lower ceiling should just wait a few years. ``Look for that to be raised,'' he says. ``That'll be easy to lobby.''
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