In his State of the Union address Wednesday, President Bush described a Social Security reform plan that would enable workers to divert up to 4 percent of wages into personal savings accounts. These accounts, which would only be available to those born in 1950 or later, would offer workers five investment options: large- and small-cap funds, international funds, and corporate bonds and Treasury bonds. According to the proposal, workers would not be able to take out withdrawals before retirement.

While the push behind the proposal is to encourage an "ownership society," by which employees take charge of their retirement savings, some are concerned about an unintended consequence. The availability of personal savings accounts for Social Security may cause workers, particularly those with lower salaries, to stop contributing to their 401(k) plans altogether.

"If you have been working hard to get low-income people to invest in your 401(k) plan and it’s been tough, but you are starting to get some traction, (then) suddenly, employees see this money in Social Security and ask ‘Why do I need a 401(k)?’ " says Dallas Salisbury, president and CEO of the Employee Benefit Research Institute.

Getting employees to contribute, let alone actively monitor and rebalance their 401(k)s, has been the biggest struggle for many companies. Some have introduced automatic enrollment features by which employees are automatically put into 401(k) investments selected by their employers.

These efforts have started to pay off, according to a recent Hewitt Associates survey, which found that 76 percent of eligible employees participate in their 401(k) plans. Unfortunately low-income workers, not surprisingly, are among the most likely to pull money out of their plans through withdrawals, according to Hewitt. This situation may intensify if they have private accounts for their Social Security, which they think they can rely solely on, Salisbury notes.

This issue may pose a challenge for employers, particularly with regards to the Employee Retirement Income Security Act non-discrimination rules, notes Mark Ugoretz, president of the ERISA Industry Committee, a Washington, D.C.-based lobbyist group representing U.S. employers. Non-discrimination rules, which are designed to prevent top executives from being able to save substantially more than lower-paid employees, limit what the top-earners can contribute to their 401(k) plans, based on what lower-earning employees are doing.

"Clearly this could skew the non-discrimination rules, thus making it difficult for middle income or those approaching upper income to make contributions in a large plan," he says.

Another consequence of the Social Security reform proposal could be that it prompts workers to be more conservative than they should be with their 401(k) investments, says James Klein, president of the American Benefits Council.

"Will people view the fact that they have Social Security in their private accounts as a reason to be more conservative with their other savings and either invest more conservatively or not invest their 401(k)s at all?" Klein asks.

On the other hand, the creation of private accounts could have the opposite effect, making employees more active in the management of their 401(k)s, he says. "Maybe if they see these accounts grow and understand them, they will become active 401(k) investors. What we need to do is make sure the latter happens," Klein says.

Since the details of the Social Security proposal are still to come, it is probably too soon for employers to address the situation. But the issue should be on their radar screen, Salisbury advises. And if employers see problems brewing, they should contact their representatives in Congress.

--Jessica Marquez, staff writer