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Introduced in the trenches of a bear market, 401(k) legislation made an ill-timed debut. Now the law's sponsors hope to strengthen their reforms with Portman-Cardin II.

Introduced in the trenches of a bear market, 401(k) legislation made an ill-timed debut. Now the law's sponsors hope to strengthen their reforms with Portman-Cardin II.

By Fran Hawthorne
January 2003
Institutional Investor Magazine

When Ohio Republican Rob Portman and Maryland Democrat Benjamin Cardin first introduced their 401(k) reform package in Congress, the bull market was roaring. But it wasn't until four years later that their bill was finally signed into law as part of the 2001 tax cuts.

So much for timing.

Taking effect in the midst of a weak economy, a bear market and a rash of high-profile corporate accounting scandals that have shaken investor confidence, the bill has faced daunting obstacles in its effort to give a much-needed jolt to America's anemic retirement savings. Portman-Cardin, as it's known, set out to encourage new plan introductions as well as a greater rate of participation in existing plans, but these days many employees remain leery of 401(k)s. There is scant evidence that Portman-Cardin has yet succeeded in either of its declared goals.

Indeed, in today's economic environment, the retirement savings crisis that Portman and Cardin hoped to remedy has only gotten worse. According to Boston-based consulting firm Cerulli Associates, as of year-end 2001, the average 401(k) participant's balance had shrunk to $36,390 from $45,681 in 1999.

Now Portman and Car-din are back at it, campaigning for new legislation to strengthen and expand the existing laws. In October they introduced a new 401(k) bill, the Protecting America's Savings Act, which they plan to resubmit when Congress reconvenes.

The first Portman-Cardin bill raised contribution limits, introduced catch-up provisions for workers over 50 and made it easier for employees to carry their 401(k)s with them when they leave the private sector for a nonprofit or government job, or vice versa. "My only disappointment is what happened in the economy," says Representative Cardin. "If we didn't have the major drop in the stock market, we would see people be more aggressive in saving."

Among its central provisions, the new bill proposed by Cardin and Portman moves up the maximum contribution of $15,000 to 2003 instead of 2006. The bill lets people wait until age 75, instead of age 70.5, to start withdrawing from their 401(k)s without paying a penalty. The penalty, an excise tax on the amount that should have been withdrawn, would be reduced to 25 percent from 50 percent. The bill also expands the tax credit for low-income savers.

Last, and perhaps most significantly, the proposed legislation accelerates the 2001 tax law's catch-up levels for workers 50 or older, enabling them to kick in an extra $5,000 in 2003, instead of 2006. Men and women over 50 are the most likely candidates to boost their contributions, and these baby boomers form a significant contingent. An estimated 20 to 25 percent of all current plan participants fall in this age group. "These people are closer to retirement and probably more interested in saving," says Gerald O'Connor, a director of consulting firm Spectrem Group.

Although there is no industry data about what portion of that group had already been making maximum contributions, there is some evidence to suggest that the catch-up provision is having an impact. As of last November, 56 percent of the eligible participants at 1,043 plans served by Fidelity Investments were contributing the extra $1,000 currently allowed.

On the other hand, when Vanguard Group made a spot check of 13 large-plan clients in October, just 5 percent of the eligible participants had signed on to make the catch-up contribution.