A Look at Bush's One-Size-Fits-All Retirement Plan

It's no wonder Americans are often befuddled by questions regarding the best way to save for retirement. Not only are there multiple IRAs to choose from, but employer-sponsored plans also come in all shapes and sizes -- 401(k), 403(b), 457, SEP-IRA, SIMPLE 401(k).

If President Bush's budget proposal goes through, though, all those variations will be consolidated into one pan-employer plan -- the Employer Retirement Savings Account.

But as we've all learned at one time or another, one size does not really fit all. A closer look at the proposal reveals some, er, irregularities.

Flexibility or a Straitjacket?

Employer Retirement Savings Accounts, or ERSAs -- not to be confused with ERISA, the Employee Retirement Income Security Act -- are similar in design to 401(k)s, but with broader application.

For one, any and all employers would be able to offer ERSAs -- including nonprofits and government agencies, both of which typically offer 403(b) and 457 plans, respectively. Individuals would be able to contribute up to $12,000, $15,000 in 2006. Individuals 50 and over would also be able to make a "catch-up" contribution of $2,000 a year, increasing to $5,000 in 2006. Those are the same contribution limits currently on the books for 401(k) plans, 403(b) plans, SAR-SEPs and 457 plans.

Like the existing plans that ERSAs would replace -- and unlike the Lifetime Savings and Retirement Savings Accounts also created in Bush's budget -- all contributions would be deducted from salary before it's taxed.

Under the proposal, beginning in 2004, all 401(k) plans would become ERSAs. Other types of plans may continue to exist indefinitely, but further contributions would not be allowed after 2004.

The Jury's Still Out

Not everyone is excited about this supposed simplicity, though.

"Simplicity without flexibility is just a straitjacket," says Janice Gregory, vice president of the ERISA Industry Committee in Washington, D.C., an employee-benefits lobbying association of Fortune 100 companies. "These rules try to squeeze all employers into one mold. That's just not how it works -- and with good reason."