When Plans Collide

Weird Reasoning?
Still, in Iwry's view, any pressure on employees to cut back on their 401(k) contributions could significantly affect plan sponsors. For one thing, corporate pension plans would be pinched because they are dependent on volume to keep fees low. So a decline in plan participation could make a 401(k) program more expensive to maintain. For another, any exodus from the corporate plan would reduce the secondary benefit that companies get from their pension plans: the ability to raise the contribution limits of highly compensated employees by a specified higher percentage than exists for the entire plan, depending on how much the rank-and-file contributes. The formula is determined under the government's "nondiscrimination" provisions (see "A Benefit at the Top," 401[k] Buyers' Guide, April).

Varian's Reitherman concedes that "we'd have to review the plan if there were any major changes." But her suspicion is that any increased attention Social Security IAs might put on retirement-savings needs could actually lead to more 401(k) contributions.

Professor Mitchell also sees that possibility. "Just the mere fact of people having a sense of ownership could make them more likely to increase their savings" by participating additionally in a 401(k), she says. Cato's Tanner agrees. "There's some thought—and [Federal Reserve chairman] Alan Greenspan, among others, has said it—that savings is a habit. If they see their money grow, they may actually be encouraged to save more" in a 401(k), he says.

And those pro-IA views were echoed in one section of the CRS report, which noted that some employees might increase 401(k) contributions as a way of offsetting some of the additional risk the IAs introduce, while other employees "might develop a 'taste for saving' that would persuade them to save more for retirement through vehicles such as Individual Retirement Accounts (IRAs)."

Indeed, Zvi Bodie, a Boston University School of Management professor who has written extensively on retirement savings, sees the argument that 401(k) plans might suffer as "weird reasoning." Bodie, no fan of the Social Security­related IAs as proposed—for example, he suggests an initial step of investing IA funds in inflation-protected government bonds—believes the attraction of the employer-sponsored 401(k) match is still the biggest draw. "I think the way young people will think about this," he says, "is that it's saving for retirement that's subsidized by their employer."

Roy Harris is senior editor of CFO.

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