SIMPLE IRA proves popular

Nation's Business, Nov, 1997 by Stephen Blakely

One option in the new SIMPLE retirement program for small businesses, which came on the market at the start of the year, is getting rave reviews, but the other is less popular.

SIMPLE (Savings Incentive Match Plan for Employees) plans were authorized by a law that was enacted last year and took effect Jan. 1. The law permits two new retirement plans exclusively for companies with 100 or fewer employees. One is the SIMPLE 401(k) tax-deferred savings plan, which is proving to be less popular with small businesses. The other is the SIMPLE Individual Retirement Account (IRA), which is proving to be quite popular.

The purpose of the SIMPLE arrangement is to give small-business owners an uncomplicated way to set up tax-deferred retirement accounts for themselves and their workers, mainly by cutting red tape for traditional 401(k)s and adapting IRAs for corporate use.

Under SIMPLE, owners and workers can defer a percentage of their pay up to an annual total of $6,000 with either the 401(k) or IRA option. Companies must contribute to workers' plans, either by matching 3 percent of a participating employee's salary dollar for dollar (up to $6,000) or by kicking in 2 percent of all workers' pay (up to $3,000) regardless of whether they participate.

All employees are granted immediate and full ownership of the funds in their accounts, including the company match.

While the SIMPLE IRA is winning favorable reviews, the SIMPLE 401(k) is seen as too complex and more expensive than conventional small-business 401(k)s because of the employer's administrative requirements and the mandatory matching contribution.

Wendell Collins, spokesperson for Merrill Lynch, Inc., of Princeton, N.J., says: "The SIMPLE IRA is vastly more popular. The reason is that the majority of small businesses find it is simpler, more cost-effective, and flexible. The biggest reason the 401(k) isn't popular is that it's more costly and the rules are more complex."

Ed Miner, first vice president for Kemper Funds of Chicago, says the SIMPLE IRA "has found a niche I didn't anticipate." Andrea O'Neill, vice president for retirement plans at Boston-based Fidelity Investments, reports "much stronger demand than expected" for SIMPLE IRAs. "We've gotten a lot of calls from employees asking how to sell their employers on the plan," she says.

Although no precise numbers are available, the Investment Company Institute of Washington, D.C., which represents the mutual-fund industry, estimates there were about 40,000 SIMPLE plans covering perhaps 100,000 people by the end of the third quarter. By those numbers, the average plan would have two to three participants -- suggesting that SIMPLE is appealing to the very small companies that the program was created to serve. "There has been a lot of growth in this product. The plans are very small. It looks like this new law is working," says institute spokeswoman Elizabeth Powell.

Experts forecast that SIMPLE retirement plans will continue to grow, especially because the tax law enacted in August removed some technical hurdles to their creation.