Law Encourages Retirement Plans

When President Clinton signs a minimum-wage increase into law today, he will also make it easier for millions of Americans to save for retirement.

Two provisions in the law affect savings:

*First, the law will make it much easier for small businesses to offer retirement plans for their workers. Currently, only about 10 percent of firms with 50 or fewer workers offer so-called 401(k) savings accounts for workers, because setting up such plans is complicated and costly. About 50 million people, half of private-sector workers, lack retirement plans.

*Second, one-income couples will now be able to put $4,000 into individual retirement accounts each year, up from a previous cap of $2,250. Now, a couple can set aside the same amount tax-free for a nonworking spouse as for a wage earner - $2,000.

"These are two significant expansions" of the nation's retirement-plan laws, says Robert Pozen, managing director of Fidelity Investments in Boston. Both changes, he says, remove "regulatory and bureaucratic disincentives" that have held back retirement savings for years.

Mutual-fund companies like Fidelity stand to gain from the law, since much of any new retirement money will be invested in mutual funds. The law's retirement provisions are effective Jan. 1, 1997.

"We think there will be substantial interest" among small employers and their workers in the new retirement plans, Mr. Pozen says. Fidelity is planning a special program catering to the new system.

Currently, he says, a company must spend thousands of dollars to start a 401(k) plan for workers and ensure that it complies with federal law. For many companies, that hurdle is too high to jump.

The new plan is called SIMPLE, for Savings Incentive Match Plan for Employees. It's for companies with fewer than 100 employees.

Here's how SIMPLE will work:

As in a 401(k) system, each participating worker will have his or her own account, with some choice of how the money is invested. For example, there might be a dozen or so mutual funds to choose from.

Workers would be able to contribute up to $6,000 of their income, tax-free, each year. The company must match these contributions, dollar for dollar, up to 3 percent of the worker's total pay; or the company can make a flat 2-percent-of-pay contribution to all employees, whether or not they have elected to set any of their own pay aside in the plan.

Not everyone is pleased with the law.

Critics say some business owners will use it for themselves, and perhaps other managers, while not promoting it to employees. Low-paid workers tend to have the lowest participation rates in voluntary retirement plans. This is a problem with 401(k) plans, too, but they have rules that reduce the contribution caps for top managers if many of the firm's workers are not participating.

"It's not a perfect system," acknowledges Pozen. "But it's a reasonable system" based on legislative compromise. Congress debated several alternatives.

In one sense, the SIMPLE plans are generous: In most 401(k) plans, the employer match is only 50 cents for each dollar a worker sets aside.