Tucked away in the massive Treasury Department proposal to reform the nation's bank deposit insurance system is a provision that could add to the risks that workers face in trying to save for retirement.

The provision is certain to add to the lobbying war that is already brewing around the Treasury plan, whose main goal is to restore the safety and soundness of the nation's banking system and protect the government's deposit insurance fund.

To achieve that goal, the Treasury would reverse a trend, present in the history of deposit insurance since its beginnings in the Depression, to spread its protection wider and wider.

Over the years, the amount of money protected in each account has risen -- it's $100,000 now -- and regulators have been more than generous in allowing different types of deposits to qualify for separate coverage.

Now the Treasury wants to cut the limit to $100,000 per person per institution, plus another $100,000 for individual retirement accounts, with perhaps even tighter limits in the future.

And at the same time, it is proposing that a special treatment that has been accorded certain retirement savings plans be ended. If Congress goes along, it would mean that these plans would be insured for $100,000 per plan, rather than $100,000 per participant as is now the case.

The plans at issue are called bank insurance contracts (BICs). They are sold to employers to offer as options to employees in savings arrangements such as 401(k) plans.

In a BIC, the bank promises to pay a certain set interest rate for a period of years. The employee gets a relatively high interest rate that is insulated from short-term market movements, and the bank gets a stable base of deposits.

The concept was pioneered by the insurance industry, however, with what is called a guaranteed investment contract (GIC).

The idea is the same, but insurance products have no government guarantee, and insurers were incensed at the regulators' decision, in effect, to pass through the Federal Deposit Insurance Corp. coverage to BIC participants.

Insurers continue to have the vast majority of this market, but banks have been gaining. And in a time of turmoil in the financial world, the FDIC insurance has been a helpful selling point.

"The fact of FDIC insurance has been seen {by employers} as a plus," said Brian Ternoey, an employee benefits consultant with A. Foster Higgins & Co. in Princeton, N.J.

However, he added that most employers also look hard at the quality of the bank issuing the BIC. While they understand that the employees would be protected, "You wouldn't want to have to go to a plan participant and say the bank went under but you're still okay," Ternoey said.

The insurers regard the current situation as not only unfair to them, but poor public policy as well.

"The life {insurance} companies have been steadily losing business to banks," said Henri R. Bersoux of the American Council of Life Insurance, a life insurance industry trade association here.

Bersoux said that "our largest companies cannot find safe assets with which to match" rates that some banks are offering -- suggesting that banks are investing in riskier assets knowing that plan participants are protected.

"One of our arguments has been that the pass-through provision has provided banks with an unfair competitive advantage, the same kind of advantage that the S&Ls had in attracting deposits nationwide," Bersoux said.

Bersoux said insurers are generally pleased with this aspect of the Treasury plan, though he noted that the proposal talks about an exception for self-directed pension plans.

"If you read the language carefully, there is a loophole ... created intentionally or unintentionally," that worries the industry, he said.

Bankers, for their part, argue that small retirement accounts are the very type of deposit and depositor that the insurance was meant to protect.

The plan appears to total up retirement accounts for insurance limit purposes and also appears to eliminate coverage for trust accounts, said Mark Burneko of the American Bankers Association.

"The intent of the proposal, which is to limit the risk to the system, is something we fully support. We don't feel this is the appropriate way to go about it. These types of deposits aren't the problem," Burneko said.

And he added that "it does seem to be somewhat confusing -- in one breath askingAmericans to increase savings and at the same time moving toward reducing the safety of their deposits."

Both sides are gearing up to defend their interests on Capitol Hill.

What will emerge is far from certain. While there is wide agreement that deposit insurance needs to be reformed, almost every interest group in town has found something to dislike in the Treasury proposal.

GICs and BICs remain the most popular options, accounting for almost 60 percent of employee contributions, according to a Foster Higgins survey.

Workers with funds invested with insurers should keep an eye on the company that writes their contract. Those with money in a BIC should keep an eye on the Hill.

In the meantime, investment experts say that the tried-and-true advice -- diversify your holdings -- is more relevant than ever today.