Retirement plan for small business would help out the firm's boss,

WASHINGTON -- At the Auto World repair shop near here, a co-owner, Charles Sullivan, is constantly clipping how-to articles to help train his mechanics.

But most of the reports have nothing to do with fixing cars. They are about retirement, and they represent "a lot of ground-level work to educate them" on the need to save for it, he said.

In cajoling young mechanics to take the long view and invest in the company's 401(k) plan, Sullivan, who is 40, has been doing exactly what many lawmakers have long hoped that business owners would do. And Sullivan said a proposed law to create a simpler retirement plan would help his six workers save more and also enable him to set aside a lot more money.

But while the plan, which was approved by Congress this month, would probably achieve what lawmakers had hoped, increasing the number of retirement plans offered by small businesses, critics said the proposal would benefit business owners more than their employees.

That is because, unlike other pension and savings plans, the new program would not limit the amounts that owners could save for retirement based on how much their employees contributed into a plan.

Critics of the bill fear that without the economic incentive, there will be no more Charles Sullivans, urging their employees to contribute, and that in the silence, workers will save less instead of more.

Congress approved the new plan -- called the Savings Incentive Match Plan for Employees, or Simple -- on Aug. 2 as part of the bill that would increase the minimum wage.

The plan was backed by the National Federation of Independent Business, the main lobby for small business, and some lawmakers said it was approved partly as a tradeoff to win support from the group for the wage increase.

President Clinton is expected to sign the bill this month, and companies could start the savings plans in January.

The new accounts would work, in one sense, like mini-401(k) plans, with employers matching the tax-deferred contributions made by their workers. Only businesses with 100 or fewer workers would be eligible.

The law would require companies, in most cases, to match dollar for dollar any amounts that employees donated, up to 3 percent of their salaries, with a cap of $6,000 a year. That would be fairly generous compared with most 401(k) plans, which typically match 50 cents to the dollar.

The questions about the possible impact of the changes are important because more than 50 million Americans work for companies with fewer than 100 employees, and only about one-eighth of those employers offer retirement plans, Labor Department figures show.

About 24 percent of companies with 50 to 100 employees offer 401(k) plans, compared with 96 percent of companies with more than 5,000 employees, according to Access Research Inc. of Windsor, Conn.

Many workers at small companies are in relatively low-paid service jobs and find it difficult to save, and they have become more vulnerable in recent years as many cost-conscious employers have become less willing to provide fixed benefits for retirement. The new type of accounts "will increase the number of companies with savings plans, without question," said Karen Ferguson, the director of the Pension Rights Center, a worker advocacy group in Washington.

"But the reality is that low-paid workers are still not going to be able to afford to save," she said. "Simple is simply an effort to strip the protections for workers so that their bosses can save more."

Indeed, in an effort to encourage business owners to adopt the new plans, lawmakers dropped an intricate series of fairness tests common to other types of retirement plans that limit how much managers can contribute into their accounts.

The aim of the tests is to insure that plans are not "top heavy," created mainly to enrich the officers of a company. So the rules tied the amount that owners and managers could set aside to the level of participation by lower-paid workers.

These rules, which made setting up savings plans complicated and expensive, often discouraged small businesses from offering any plan.

Now that small businesses will be able to set up plans without the limitations or extensive paperwork of the fairness rules, business owners will be able to put away up to $6,000 a year whether their employees save anything.

Joseph Blumenthal, who owns Downtown Sounds, a musical instrument retailer in Northampton, Mass., said the new rules would allow him to increase his tax-deferred retirement savings.

Each year, he has put $2,000 into an individual retirement account, his only tax-deferred savings vehicle. But if he had started a 401(k) or a traditional pension for himself and his four full-time workers, he would have lost the right to deduct the IRA contributions from his taxes, because they can be written off only by people who are not covered by other plans.

Blumenthal also said that few of his employees, who make $18,000 to $22,000 a year, had shown any interest in saving for retirement. And if he had started a traditional plan and hardly anyone else had participated, his contribution into his own plan would have been minimal because of the fairness tests.

So, he said, Simple might be "a win-win plan" for his store because his workers would get a retirement program and he would be able to increase his own savings.

Sullivan, the co-owner of Auto World, said he would also increase his retirement savings to the maximum $6,000, up from the $4,200 he now contributes, an amount limited by the fairness tests.

Sullivan, who is married and has three young children, said he had read hundreds of the articles he clipped about the need to amass huge savings for retirement. He earns $57,000 a year, and he said he shouldn't be denied a chance to tap into more of the power of tax- deferred savings just because he owns part of the company.

He said that switching to the Simple plan, which requires little paperwork, from a 401(k) would save his company at least $800 a year in administrative costs.

As a result of his exhortations to his workers, three of his employees have set aside 3 percent to 5 percent of their pay in the 401(k). But one of Sullivan's employees, Wayne Peron, who is 33, said he was still contributing just 1 percent of his salary.

"I'd like to put more," said Peron, who is married, owns a house and has a 3-year-old daughter. "But right now I'm trying to figure out how to make ends meet with the mortgage and everything else."

He said that once he paid off an auto loan next year, he would likely increase his contributions if Auto World switched to the new program, because of the higher company match.

Ferguson, of the Pension Rights Center, said that if most workers are required to save as a condition of getting contributions from their employers, many workers will never build much of a nest egg. And society could face huge costs in providing for them later.

But Jon Garvey, an Auto World mechanic who sets aside 5 percent of his salary, said the new plan would be better than nothing. He said that most small businesses were "running their operating expenses out to the penny" and that the plan might be the only type that many businesses could afford to offer.

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