Retirement Issues Remain on Legislative Agenda

After the drawn-out and arduous pension reform debate preceding enactment of the Pension Protection Act (PPA) last summer, Congress is unlikely to pursue new pension legislation this year. However, lawmakers are discussing a variety of retirement issues. Some of those discussions relate to technical corrections to the PPA, while others focus on enhancing workers’ retirement security. Fees in 401(k) plans are also attracting considerable attention.

The supplemental spending bill for operations in Iraq and Afghanistan, which President Bush signed on May 25, 2007, includes a few technical corrections to the PPA. The technical corrections clarify funding relief for commercial airlines, address retiree health transfers under Internal Revenue Code section 420 and clarify the revocation of an election to be treated as a multiemployer plan.

Following Up on the PPA
In a May 3 hearing, the House Education and Labor Committee subcommittee on health, employment, labor and pensions discussed modifications to the PPA. Witnesses at the hearing included representatives from the major employer trade organizations, the Air Line Pilots Association, the National Multiemployer Coordinating Committee and the American Society of Plan Professionals and Actuaries (ASPPA).

Employer groups asked for several modifications, including a delayed effective date for some provisions to give the government more time to issue guidance and give employers more time to make the necessary changes. They asked the government to revise the funding targets for plans that are not subject to the deficit reduction contribution, clarify the asset smoothing method, modify the restriction on lump sums in underfunded plans and adjust the combined plan limit. They also requested legislation to correct the PPA’s unintended consequences for multiemployer plans, most importantly the “revolving door” cycle for plans in the red zone, and modify the PBGC maximum benefit to reflect the legal requirement for airline pilots to retire at 60 instead of 65.

The May 3 hearing was the first in a series of hearings to address modifications to the PPA, according to Chairman Rob Andrews (D-New Jersey). Subcommittee members noted that the committee has no intention of changing the fundamentals of the PPA -- at least not until the effects of the new law have become clearer. Rather, the committee plans to focus on technical corrections and inadvertent deviations from legislative intent.

Lawmakers are discussing other technical corrections but have not yet introduced related legislation. Such legislation is often complex and slow-moving, so it’s uncertain whether more technical corrections to the PPA will move through Congress in 2007.

Looking Toward Retirement Security
Lawmakers have introduced several bills to enhance workers’ retirement security by expanding access to retirement savings accounts, encouraging workers to take annuities when they retire and making other changes.

For example, the Women’s Retirement Security Act (S.1288), which is sponsored by Senators Gordon Smith (R-Oregon), Kent Conrad (D-North Dakota), John Kerry (D-Massachusetts), Jeff Bingaman (D-New Mexico) and Olympia Snowe (R-Maine), would try to rectify perceived inequities between men and women at retirement. The bill would require plans to set aside half of a participant’s plan assets upon receiving written notice of separation or divorce proceedings. It would impose penalties on plans that failed to respond promptly to requests for information and require plans to charge expenses related to qualified domestic relations orders (QDROs) to the plan instead of to the participant and the alternate payee.

Under the act, employers would have to provide automatic IRA payroll deduction arrangements for employees not covered by a qualified retirement plan. The act would expand 401(k) eligibility to part-time employees who worked at least 500 hours in each of the last three years. Employers would not be required to provide matching contributions and could exclude these part-time employees from nondiscrimination and top-heavy tests.

The act also would allow employees to transfer up to $500 in unused funds from a flexible spending arrangement (FSA) to a deferred compensation or qualified retirement plan. It would exclude certain annuity payments from gross income. It would also expand the Saver’s tax credit. When offered a choice between cash and qualified retirement planning services, employees who opted for the planning services could exclude up to $1,000 of their cost from their taxable income.

Other retirement-related legislation would facilitate automatic deductions for IRAs and exclude some annuity payments from gross income. Senator Bingaman and others introduced the Automatic IRA Act (S.1141) in April, which would require companies with more than 10 employees to offer workers the option of having wages deposited into an IRA account. And Representatives Stephanie Tubbs Jones (D-Ohio) and Phil English (R-Pennsylvania) and Senator Smith introduced the Retirement Security of Life Act, which would establish tax incentives to encourage plan participants to choose annuities. It would exclude 50 percent of annuity payments from gross income, up to $20,000. The exclusion would not apply to amounts received from section 401(a) qualified plans, section 403(b) plans and section 457 governmental plans.

These bills were also introduced during the 2005-2006 congressional session but didn’t go anywhere. They’re not likely to make it to enactment this time around either, but lawmakers hope their bills will become part of a broader discussion on future pension legislation.

401(k) Fee Disclosure
Recently, the media, Congress and the administration have focused on 401(k) fees. In March, Representative George Miller (D-California), who chairs the House Education and Labor Committee, held a hearing to discuss fee arrangements in defined contribution plans and best investment practices. The hearing received considerable bipartisan support. Chairman Miller is expected to introduce legislation aimed at making 401(k) fees more transparent. Additional hearings on the topic are also expected.

The U.S. Department of Labor (DOL) is reviewing fee disclosure (see Watson Wyatt Insider, May/June 2007), and the Securities and Exchange Commission (SEC) is getting involved as well. In a recent speech, SEC Chairman Christopher Cox said that current fee disclosure arrangements have fallen “tragically short,” allowing the financial services industry to “skim off” an unjustifiable share of participants’ assets. The commission is working on a formal rule to address potential abuses.

Retirement and benefits-related issues are expected to remain on the legislative agenda throughout the year, although they may take a back seat to health care and compensation issues.