Industry Finds Good And Bad In Bushs Tax And Savings Plans

By

Industry experts say it is too soon to call the outcome of President George W. Bushs tax proposals but note that if passed as is, they could have profound changes on sales of annuities and retirement plans.

Among other features, Bushs plan would let married couples invest as much as $30,000 after-tax in tax-exempt savings accounts, a proposal that some argue would devastate the sale of annuities, which are tax-deferred.

But the potential damage from the legislation, if passed, could be mitigated “by legislative compromise, annuity benefits including protection and payout features, and new product innovation,” argues Andrew S. Kligerman, an analyst with Bear Stearns Inc., New York.

Industry lobbyists in Congress are actively trying to shape the Bush proposals more in favor of insurers.

One compromise being sought by the American Council of Life Insurers, is the addition of tax incentives for annuity purchases.

With many workers anticipating a retirement lasting 30 years or more, “the annuity is the only product that guarantees lifetime income to its owner,” the ACLI points out.

Bushs plan would create a variety of new types of retirement plans that could pose a threat to certain traditional insured products.

Employer retirement savings accounts (ERSA) would consolidate employer-sponsored defined contribution retirement plans into a single simplified plan, eliminating the need for 401(k)s, SIMPLE 401(k)s, 403(b)s and 457 college savings plans.

In an analysis of the administrations proposals, the Principal Financial Group, Des Moines, Iowa, notes that the top-heavy test would not be required for all defined contribution plans under the proposed ERSA rules. That test is designed to assure that employer plans do not discriminate in favor of high-level executives.

Nondiscrimination requirements for ERSA contributions would be satisfied by a single test, or plans could choose a new safe harbor to avoid this test altogether, the Principal points out.

Other elements of the Bush proposals include lifetime savings accounts and retirement savings accounts.

LSAs could be used for any type of saving, including childrens education or a new home. Account holders could contribute $7,500 per year, regardless of age or income. Contributions would not be deductible but earnings would grow tax-free, and the money could be withdrawn without penalty at any time.

The proposed retirement savings accounts would consolidate traditional IRAs, nondeductible IRAs and Roth IRAs into a single plan.

Anyone could contribute up to $7,500 per year (on top of LSA contributions), to an RSA. Contributions would not be deductible but earnings would grow tax-free, and savings could not be withdrawn without penalty except for retirement.

Despite their potential for reducing demand for tax-advantaged products, the proposals are not causing insurance executives to panic.

For one thing, they point out, theres a long way between proposed legislation and what is actually passed and signed into law.

“Its far too early to predict the final form of President Bushs economic package,” says Leslie Uyeda, a spokeswoman for John Hancock Financial Services Inc., Boston.

Executives at Hancock still believe the aging of the baby boom generation will present ample opportunities for significant sales, Uyeda says.

Chris Bowman, vice president, retirement and investor services for Principal Financial Group, says his company likes many of the proposals.

Creation of a single defined contribution retirement plan as envisioned by the president would be a boon to the industry, Bowman says.

“Frankly, we find it hard to understand why employers would all have different plans,” he says. “Simplification would allow us to provide better service and reduce complexity, and it might encourage more employers to form retirement plans, since the plans would be easier to deal with.”

Principal executives are not thrilled with some other aspects of Bushs proposals, however, particularly LSAs and RSAs.

“Were a little concerned about LSAs for a couple of reasons,” says Bowman. “First, it could draw individuals away from investing for the long term, especially for retirement.”

As a market leader in 401(k)s, Principal is also concerned that both LSA and RSA accounts might cause some employers to decide they dont need to set up a retirement plan at all.

“We think an employer-sponsored retirement platform is the best way to go,” Bowman explains. “Seventy percent of Americans dont save because they lack discipline. An employer-sponsored plan offers discipline. It also offers advice and counseling.”

As for the likelihood of any of those proposals passing Congress, Bowman says he wouldnt venture a guess. But he notes the legislative process is lengthy. “Either way, its not going to be a slam dunk.”

DArcy Foster Rudnay, a spokeswoman for Lincoln Financial Group, Philadelphia, says of the Bush proposals that “anything that encourages people to save for retirement is good.”

Lincoln Financial executives also believe the Bush proposal would not affect the companys annuity business much because its clients tend to be more affluent, she adds.

Stewart Brahs, a lobbyist for Principal, notes that the Bush plan is “only a proposal.” Moreover, its only one of several different bills now before Congress that would potentially affect insurance and retirement plans, he says.

And in a recent conference call for investors, American International Group Chairman Maurice Greenberg predicted the fate of the LSA and RSA proposals.

“Virtually dead on arrival,” Greenberg said flatly.


Reproduced from National Underwriter Edition, February 17, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.