Lawmakers in Washington this week are expected to tackle a key piece of pension reform legislation, known as the Pension Protection Act of 2005, which could significantly impact the financial services industry.
Experts say that unlike Social Security reform, which appears to have finally met its death within the current administration because of President Bush's controversial private accounts, some sort of a pension reform plan could actually see the light of day by early next year.
That's mostly because, much like the impending insolvency that faces Social Security, the foundation of the nation's pension system is badly distressed.
According to the Federal government's latest figures, the U.S. Pension Benefit Guaranty Corp. (PBGC), which is the insurer of corporate plans, has been running a $23 billion deficit since taking over the plans of United Airlines and U.S. Airways. If another major corporation with a big pension obligation files for bankruptcy, PBGC could fall even further into the red. Analysts have a grim outlook for struggling automaker General Motors, and bankrupt Northwest Airlines has said it's unsure if it can meet its funding requirements. Thus, lawmakers are hoping to curb that risk by enhancing pension funding and adding new sources of pension revenue, and they'd like to get the lion's share of the work completed before the next holiday break.
"It's not a question of whether they'll take up pension reform, it's more of a question of when," said Leslie Kramerich, who closely follows pension and tax issues from the government affairs office of the Investment Company Institute in Washington. "If it isn't this week, we hope it will be the first item on the agenda when Congress resumes next year. This is one of those legs of the retirement stool that people would like to see strengthened."
The final pension reform package, however, will surely come only after a pitched battle on Capitol Hill over the next two weeks, with corporate America on one side and the nation's unions on the other side.
The current trend among many large corporations is to dump traditional pension plans because they're too costly. New York telecommunications giant Verizon did just that a few days ago and expects the move will save the company $3 billion over the next 10 years. It plans to expand its employees' 401(k) plans instead.
"This restructuring reflects the realities of our changing world," said Verizon CEO Ivan Seidenberg. "Companies today, including many we compete with, are not implementing defined benefit pension plans."
But a number of powerful Washington lobbies, like the 2.7 million-member National Education Association and the 16.1 million-strong AFL-CIO, steadfastly oppose changes to pension benefits that might ease the funding pressure many corporations currently face. They fear for the demise of the old-fashioned, rock-solid pensions guaranteed under union contracts and the rise of more cash balance plans that incorporate 401(k)s.
"We are deeply concerned by the [Pension Protection Act's] sweeping changes to the private pension rules and its severe impact on the retirement security of millions of American workers," said William Samuel, director of the AFL-CIO's department of legislation in a recent letter to House Ways and Means Chairman Bill Thomas (R-Calif.).
And while on the surface, the nation's defined benefit plan system seems to have very little bearing on the retail side of the money management industry, experts say pension reform would simply allow everyday Americans to put more money into retirement savings products.
Steve Bartlett, president and CEO of The Financial Services Roundtable, a Washington lobbyist for the money management industry, is urging the House of Representatives to act as quickly as possible on the Pension Protection Act because "pension reform will strengthen the ability of Americans to save and invest for retirement," he wrote in a letter to House Speaker J. Dennis Hastert (R-Ill.). "The time to act is sooner, rather than later."
But the bill under debate in the House - the Senate has already passed its version of pension reform and it isn't nearly as friendly to the industry - contains several provisions that carry more specific implications to the retail side of the business.
For starters, the Pension Protection Act would make permanent the higher annual contribution limits for IRAs and qualified pension plans, including the catch-up provisions for individuals age 50 and older. Enacted under the Economic Growth and Tax Relief Reconciliation Act of 2001, those measures are scheduled to sunset in 2010.
Another provision would encourage employers to offer automatic enrollment in qualified retirement plans. Currently, most workers must choose to participate in a plan. Automatic enrollment would enroll them in a default plan unless they choose not to participate. Some recent studies have shown that employee participation in qualified retirement plans increases when automatic enrollment is offered.
"If you have auto enrollment, you get more non-savers contributing," said Sarah Holden, a senior economist at the ICI. "It brings more people in, particularly those with lower incomes, and prepares more people for retirement."
Holden also noted that if the higher IRA contribution amounts aren't made permanent, the nation would revert from its current annual cap of $4,000 to the $2,000 limit that was instituted in 1981.
"That would be a travesty, in terms of providing people with retirement savings opportunities. The IRA is meant for people without 401(k)s at work," Holden said.
But 401(k) contribution limits would also be impacted. Their annual limits would go back to $3,000 from the current maximum contribution of $14,000, she said.
Also included in the bill is a measure to facilitate direct deposit of tax refunds into IRAs and a proposal that would make permanent a government credit that supports the retirement savings of low- and moderate-income workers.
A final provision would provide more widespread access to investment advice for defined contribution plan participants. In short, according to the bill, workers would be offered access to an investment adviser. The provision would also limit the legal liability of employers, who are oftentimes reluctant to provide access to advice because they're uncertain about their fiduciary responsibilities.
Access to investment advice, however, could prove to be one of the more contentious points of the legislation. In its letter to House Ways and Means Chairman Thomas, the AFL-CIO said the provision would undermine workers' retirement security.
"[The Pension Protection Act] would allow insurance companies, mutual funds, and other financial services companies to provide investment advice to 401(k) participants even when these advisers have a financial interest in providing advice that is not in the best interest of participants," Samuel said, adding that the disclosure requirements contained in the bill are not sufficient to protect workers.
In a reflection of exactly how tough it is to handicap the bill's future - it narrowly escaped the House Ways and Means Committee last month, as lawmakers voted along party lines - officials for Rep. Stephanie Tubbs-Jones (D-Ohio) said the congresswoman generally supports pension reform. Four of her district's largest employers - auto parts maker Eaton, National City Bank, Key Bank and the Cleveland Clinic - use cash balance plans and the congresswoman wants those premiums preserved.
She even likes the investment advice provision.
"She's in favor of anything that gives workers a clearer picture of the financial future," said Jorge Castro, Tubbs-Jones' tax and trade counsel.
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