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Dan Otter

Ersa, Lsa, Rsa Reintroduced

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RSAs and LSAs...savers will love them...


Key problem that I see with LSAs is that LSAs will become nothing more than tax-free consumption accounts. LSAs will be Teflon savings accounts--nothing will stick.


Key benefit is that doityourselfers immediately will be able to avoid their high cost 401(k)s/403(b)/457s...They can just divert their retirement money to their LSAs--but then they have to have the motivation to discipline themselves to learn a little about passive (index) investing and ride the waves of the ups and downs of the market.


Key benefit is that folks who are motivated to save, will be able to without uncaring school boards getting in their way. But we know that 30% in the lowest quartile don't save a penny. These are the folks who live pay day to pay and who will probably have to live that way all of their lives. Unless they learn how to budget and understand that they must save today to consume in retirement. Life after all is said and done is still a trade-off.


Cheers, Ted


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Guest Chuck Yanikoski

This is essentially the same plan that was introduced last year, though with some modifications that were designed to address the criticisms last year's proposal received. I think that the criticisms are still valid, but less so now. By the same token, the benefits have also been reduced, so overall it is kind of a wash.


The most interesting question for me is whether this proposal will actually be enacted or not, and that is largely a question of (a) how it is packaged, and (b) whether the White House will really push for it.


It appears that this proposal is going to be packaged into a re-written HR 1776, which was last year's Portman-Cardin bill that aimed to expand and make permanent the EGGTRA changes. Tying the ERSA (etc.) proposal to extension of EGTRRA makes sense from a reformer's point of view, but it makes the whole package a lot more expensive, given the mandatory 10-year budget horizon, so it makes final passage less likely.


It also remains to be seen how much political capital the White House will expend on this (and, frankly, how much it has to start with). This being an election year, the agenda is larded up with, well, lard, in a budget that is already very very deep in the red. The majority of items in the budget will probably never even come to a vote in Congress. Unless the ERSA plan is not just on the agenda, but pretty high on the agenda, it does not have much of a chance. And we won't know for a while whether it is or not.


It will also be a short legislative year because of the elections, so there is less opportunity to get it done.


At the Congressional press conference before this item came into the budget, the sponsors admitted that there did not seem to be much chance of passage this year. Perhaps they feel better now that it has been formally included in the budget proposal, but unless this starts to pick up some serious momentum, it's probably too soon for anyone to get seriously excited about it for 2004.


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This story went out to our email subscribers Friday and is now available on the home page:


ERSA 2.0 and the 403(b) by 403(b)wise

Latest reincarnation of ERSA may not be a panacea for 403(b) participants.


When the Employer Retirement Savings Account (ERSA) was first rolled out last year many 403(b) advocates, including 403(b)wise, were cautiously optimistic. Our enthusiasm centered around the idea that if most retirement plans — 401(k), 403(b), 457(b), SAR SEP — morphed into one plan (ERSA), simplicity and understanding would rule, leading to greater and wiser participation.


Historically 403(b) plans have suffered from just that: lack of simplicity and lack of understanding. These problems are particularly acute at k-12 institutions where participation rates are about 40 percent, and the typical investment options are limited to high-fee annuity products. Worse, school district officials have shown little understanding of the 403(b), and even less inclination to rectify these problems. It was reasoned that ERSA would force employers to become more of a fiduciary which might in turn lead to better investment offerings and better education.


After initial fanfare following its February 2003 unveiling ERSA fell off the radar until its reintroduction this week (ERSA 2.0 if you will) as part of the 2005 Bush budget proposal. While still intrigued by the ERSA concept, we at 403(b)wise are beginning to question the wisdom of this plan. In fact we see parallels between ERSA and the efforts to improve public education. Instead of simply fixing public schools, we trot out charter schools, magnet schools, and vouchers. Arguments can be made that each of these concepts can improve education for those participating. But arguments can also be made that each of these education alternatives dilute education overall and simply takes the focus off the real problem: helping all public schools. Same thing with the 403(b). Instead of fixing it, we trot out a new retirement plan which may create new unforseen problems.


Slowly but surely we are beginning to see tangible improvement in the 403(b) plan. Participation rates in mutual funds are increasing, and best of all employers are starting totake control of their 403(b) plans. Closer to home 403(b)wise has experienced a large increase in traffic in the past year, and the second edition of our book The 403(b) Wise Guide continues to sell briskly. We contend that participants and employers are starting to get it.


The 403(b) contains some unique provisions that would end with ERSA. Currently, participants unhappy with their employer's investment offerings are eligible to perform something called a 90-24 transfer into the vendor of their choice. Educational institutions are allowed to offer both a 403(b) and a 457(b) to their employees. This means that employees can contribute $13,000 (for year 2004) into each plan for a total contribution of $26,000. Those eligible for catch-up provisions can contribute even more. Just recently a bill was introduced to allow all state workers, not just teachers, to participate in a 457(b) plan and a 403(b) plan. Finally, teachers are eligible for an additional catch-up provision called the 15-year-rule which allows an additional lifetime contribution of $15,000. All of these features would disappear under ERSA.


Schools and non-profits who participate in the 403(b) are inherently different than for-profit business. It may simply be too unwieldy to blend these disparate entities into one retirement plan. In fact it is quite possible that the interests of schools and non-profits will be swallowed whole in ERSA. Already the American Society of Pension Actuaries is suggesting to the Treasury Department that "with respect to the ERSA proposal, that they consider retaining the 401(k) name since it has significant public brand recognition." While true that the 401(k) enjoys widespread name recognition, such suggestions do not bode well for the interests of schools and non-profit employees.


In many respects the 403(b) is an ugly ducking. But changing its feathers may not be the answer. When it comes to the 403(b) simply addressing what ails the plan may be the wisest course of action. Plus, as we all know ugly ducklings sometimes grow up to be beautiful swans.

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