How pension reform affects you
The lead negotiator on pension reform says conferees have reached a tentative agreement; others less certain.
By Jeanne Sahadi, CNNMoney.com staff writer

NEW YORK (CNNMoney.com) -- Lawmakers negotiating pension reform legislation may have reached a tentative agreement on what to include in a final bill that would toughen funding rules for defined-benefit plans and encourage savings in 401(k)s.

The chairman of the negotiating group, Sen. Mike Enzi (R-Wyo.), said on Wednesday that the provisions were being put in writing and that the group would meet on Thursday to try and finalize the deal.

"I think everything's resolved, pending getting the exact wording," Sen. Michael Enzi, R-Wyo., chairman of the Health, Education, Labor and Pensions Committee, said Wednesday.

But not everyone agrees on how close a deal is. "There are some moving parts still," said House majority leader John Boehner (R-Ohio).

Even if an agreement is reached, there is no guarantee that pension reform legislation is a done deal. There can be a lot of bartering during the drafting of the conference report so that legislation will garner enough votes to pass in both the House and the Senate.

Plus, there is no guarantee that the conference report will be done in time to be voted on before lawmakers take their summer break; the House's break begins the week of July 31.

"The biggest enemy is time," said Anne Mathias, director of research for the Stanford Washington Research Group.

Why should you care?

Forty-four million workers are covered by defined benefit pension plans and 65 million participate in defined contribution plans like 401(k)s, although close to 30 million more are eligible to participate.

Pension reform legislation could have a direct impact on you in several ways:

Pension plan funding: The legislation would impose a higher funding standard -- the goal would be to be 100 percent funded versus 80 percent to 90 percent under current law. Plans that are less than 100 percent funded would have to increase their payments into the plan.

Workers concerned that their companies are in bad financial shape might benefit because there will be more money in the plan, which means there would be greater likelihood they would get paid their full pension, said Brian Graff, executive director of the American Society of Pension Professionals and Actuaries (ASPPA).

However, Mathias said that more stringent funding requirements combined with less liberal accounting rules -- which the legislation also calls for -- could increase the number of companies that choose to freeze their plans. A company will pay out only workers' benefits accrued up until the freeze.

Most agree, however, that pension reform or no, the trend toward freezing pension plans will continue.

Cash-balance plans: Currently there is a question about the legality of the design of cash-balance plans.

A cash-balance plan differs from a traditional defined benefit plan in terms of how it is funded.

In a traditional defined-benefit pension plan you accrue the greatest portion of your benefits in the final years of a long-tenure at a company.

In a cash-balance plan, a company bases its annual contributions to the plan on your current salary and the interest rate return guaranteed in the plan. That can be an advantage for younger workers, who may switch jobs several times in a career.

The legislation will offer parameters for the design of cash-balance plans going forward, Graff said.

And the end result may be that more small and mid-size businesses -- who were concerned about liability issues -- begin to offer them to attract workers, he said.

The legislation would not be retroactive, however. That means that the courts deciding cases in which workers have sued their companies over the conversion of their defined-benefti plans to cash-balance -- e.g. at IBM -- will not get any clarity as to the legality of those plans, Graff said. And there's no guarantee that the courts will use the legislation's design parameters as guidance in making their decision.

401(k)s: The legislation as it has been discussed so far would include a provision to encourage companies to automatically enroll employees eligible to participate in the plan.

Studies show that of all workers eligible to participate in their 401(k) plan, only about 70 percent do on average. Automatic enrollment, which about a fifth of large companies already offer, is estimated to boost the participation rate to over 90 percent.

The legislation also might allow 401(k) providers to offer investment advice to plan participants. Negotiators until Wednesday were still discussing how this change could be implemented without creating a conflict of interest.

In addition, pension reform likely would make permanent the increased annual contribution limits to 401(k)s and IRAs, including catch-up provisions, that are currently set to expire after 2010.

And it would make permanent the "savers' credit" -- which is a federal match in the form of an income tax credit for low-income worker who save money in IRAs or their employer's retirement plan. Currently the credit is scheduled to expire by 2007.

-- Reuters contributed to this report Top of page

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Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.