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Your retirement money: Changes ahead
Lawmakers may soon vote on making changes to your 401(k) and pension.
December 1, 2005: 6:15 PM EST
By Jeanne Sahadi, senior writer
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NEW YORK ( Along with all the other reforms debated or legislated this year - Social Security reform, bankruptcy reform, tax reform add pension reform to the mix.

Among the major proposed changes by lawmakers are boosting employee participation rates and contributions to 401(k)s and imposing on companies tougher standards for the funding and transparency of their defined-benefit pension plans.

Concern over underfunding in company pensions has grown, especially since United Airlines declared bankruptcy in 2002 and had to turn over its pension obligations to the Pension Benefit Guaranty Corp, the federal agency that insures the pension benefits of 44 million workers and retirees. In June, the PBGC reported that the total shortfall in insured pension plans rose to $450 billion.

The Senate passed its own version of a pension reform bill in November. But the House has yet to vote on its bill. Given all the other legislative business competing for Congress' attention before Christmas, that vote may wait until early 2006.

In any case, it's unlikely that the House and Senate will have time before January to negotiate a final piece of pension reform legislation to send to President Bush, said Anne Mathias, research director for the Stanford Washington Research Group.

But she predicts that by April 15 the deadline for companies to file their 2005 pension-related tax documents -- legislation will be finalized. Another reason she expects to see action: the current law governing pension plans expires at the end of this year. If something doesn't pass by April, due to a change in interest rates used to determine a plan's liabilities, companies' pension contribution requirements will skyrocket.

Here are some of the key provisions from the bills under consideration:

Ensuring pensions are adequately funded: Both pension reform bills increase the target for funding to 100 percent for single-employer defined-benefit plans. That's the percent of assets a plan ideally should have today to meet its future obligations. Currently plans with between 80 percent and 90 percent of assets needed are considered acceptable.

But each bill has a different threshold for what would be considered an "at risk" plan.

Companies with plans deemed "at risk" must adhere to special rules requiring them, among other things, to make higher contributions to the plan than the minimum required and to pay higher insurance premiums to the Pension Benefit Guaranty Corp. (PBGC) the federal agency that steps in to pay pension benefits when a company terminates its plan and can't pay what it promised.

Under the House bill if a plan's assets fall below 60 percent of its liabilities it would be deemed "at risk" and benefit accruals would be frozen so the plan's liabilities don't increase. If a plan's assets fall below 80 percent of what's needed, the plan would not be allowed to increase benefits or make lump-sum payments unless the company paid for those measures in full and upfront.

The Senate bill, by contrast, ties a plan's funding status to the parent company's credit rating. If a company's bonds are below investment grade for three consecutive years and its pension plan has less than 93 percent funding, it would be deemed "at risk."

In an analysis of the proposed changes, the American Academy of Actuaries notes that both bills lack adequate incentives for employers to overfund their plans. "Unless employers can receive an economic value from surpluses, they will not contribute any more than required," the report said.

Making pensions more transparent: Both bills would increase the reporting requirements for pension plans. The Senate bill, for instance, would require companies to provide workers and retirees with annual status reports that contain, among other things, the level of funding in the plan and how it compares to the two years prior plus information on the plan's investments.

Boosting 401(k) participation: Both the Senate and House bills call for employers to automatically enroll all eligible workers in the company's 401(k) 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 offer already, is expected to boost the participation rate to over 90 percent.

Boosting 401(k) contributions: The House bill also provides an incentive for companies do three things:

Automatically set the employee's contribution in the first year at 3 percent of pay and increase that amount by one percentage point a year until reaching 6 percent.

Offer a 50 percent matching contribution or contribute 2 percent of pay for all employees whether they contribute or not.

Allow the employer matches to vest after two years, well below the typical five-year period. If an employee leaves a company before his matches vest, he forfeits them.

And it 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.

Other provisions: The Senate bill calls on companies to make their pensions more portable for workers who quit their jobs, and simplifies the rules governing a worker's ability to rollover one retirement account into another.

It also would prevent employers from overloading their 401(k) plans with company stock, thereby making it easier for workers to diversify their investments.

The House bill, meanwhile, would prohibit a company from funding its executive deferred compensation plan if its pension plan is less than 60 percent funded.

And both bills also would let companies give workers access to independent professional investment advice for their 401(k) investment decisions, and would require only that the advisor, not the employer, assume fiduciary liability for that advice.


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