Ways and Means Committee Holds Hearing on DB Plan Funding and Investment Advice

On Oct. 1, 2009, two panels testified before the House Committee on Ways and Means on retirement-related matters. The first focused on, and lobbied for, defined benefit (DB) pension funding relief. The six panelists, including Watson Wyatts director of Retirement Research, Mark Warshawsky, Ph.D., provided a wide range of experience and expertise. While it was universally accepted that pension relief is necessary, panelists disagreed about its form and who should receive it. Some advocated temporary relief from certain provisions of the Pension Protection Act of 2006 (PPA), while others argued for permanent changes to the law.

The second panel focused on investment advice provided to defined contribution (DC) participants, specifically who can give investment advice to employees and how it should be provided.

Panel 1: DB pension plan funding relief
All of the panelists agreed that pension funding relief is critical for the survival of pension plans, jobs and, in some instances, the companies themselves. A compelling case for the economic benefit of relief was made by William Nuti, the chief executive officer (CEO) of NCR, who testified on behalf of the American Benefits Council. His testimony carried a great deal of weight, both because he is CEO of a Fortune 500 company and because he has a broader perspective on the consequences of inaction for the nations businesses as a whole. Nuti lobbied for a longer amortization period, supporting the Pomeroy Bill as a step in the right direction for pension funding relief. While

Nuti believes funding relief should be available to all DB plan sponsors, Norman Stein of the Pension Rights Center believes relief should be reserved for active plans in which participants continue to accrue benefits.¹ While Nuti argued that relief for all pensions would help secure jobs, Stein maintained that the premise that relief for frozen plans would preserve jobs was unsupported by facts and does not stand up to even modest scrutiny.

Damon Silvers, associate general counsel of the AFL-CIO, offered yet another opinion. He argued that the short-term approach the Pension Protection Act takes to the valuation of pension assets is both mistaken as an analytical matter and is a powerful accelerant to fundamentally destructive trends. He claimed the PPA shortens the investment time horizon for pension funds, which he believes is counterproductive given that pension assets are long-term vehicles. Silvers also claimed that changing the PPAs rules would not provide enough relief to revive the private pension system. For that, he suggested Congress look at universal shared responsibility for retirement security requiring employers to fund some minimum retirement benefit, regardless of the type of retirement plan offered to employees.

While Silvers argued for a complete overhaul, Warshawsky said that the PPA is a good law that would have helped corporate pensions had the financial crisis come later. If the PPA had been given a little more time to reap results, he said, corporate pensions would be in a better position to weather the economic storm, either from different investment policies or from larger asset cushions. He believes temporary funding relief will be sufficient to see employers through these hard times. Warshawsky also lobbied for reforms to the reversion tax, which he believes would encourage companies to develop larger funding cushions.

Craig Rosenthal, a principal at Mercer, said many calendar-year plans still face significantly higher required contributions in 2009 compared with 2008, despite recent changes to PPA regulations. Furthermore, he maintained that most non-calendar-year plans will not receive the same relief as calendar-year plans, which could make many of these plans subject to benefit restrictions and much higher required contributions in 2009. Exacerbating the problem are declining credit balances, which Rosenthal believes will virtually disappear by 2010, creating particularly tumultuous conditions for the private pension system.

Warshawskys testimony supported this point by projecting employer contributions for 2010 and 2011. This testimony was crucial in illustrating to the committee the urgency of immediate pension relief. The continued acceleration of projected funding requirements between 2010 and 2011 strengthened the case that significant contribution increases under current PPA rules would not only cripple pensions they could also trigger job losses and even bankruptcies.

Although most panelists focused primarily on single-employer pension plans, Judith Mazo, senior vice president at The Segal Company, testified on behalf of the National Coordinating Committee for Multiemployer Plans. She urged the committee to provide funding relief for multiemployer plans, suggesting several potential supports for both solvent and troubled plans, including permitting longer amortization periods for healthier plans and allowing mergers and short-term tax credits for plans in greater distress. She estimated the cost of the proposed credits for troubled plans at about $10 billion.

While no clear consensus emerged as to who should receive relief or what form it should take, the committee appeared convinced of the importance of providing pension funding relief before the 2010 funding requirements are finalized.

Panel 2: Investment advice for DC plans
The committee and panel agreed that the recent economic turmoil has demonstrated that many people urgently need professional investment advice. The committee and panelists also concurred that advice should be given independently to avoid conflicts of interest.

The panel was concerned, however, that the bill proposed by the House Education and Labor Committee would nullify approved pre-PPA investment advice provisions. Robert Chambers from McGuireWoods LLP warned that the committees bill would invalidate many, if not most, of the pre-PPA provisions addressing conflicts of interest. Recommending that the current PPA rules be respected and developed, he said the costs and administrative burden of complying with the current bill could discourage employers from providing any investment education, thereby leading to employees investing blindly or searching for advice elsewhere.

More specifically, Edmund Murphy from Putnam Investments and Christopher Jones from Financial Engines said the new bill should not invalidate the previously approved SunAmerica model, which uses computer programs to offer sound investment advice while protecting against conflicts of interest. They maintained that computer programs offering investment advice are convenient and cost-effective, advantages that are particularly crucial in this economic environment. They emphasized that with companies already struggling to navigate the turbulent economy and keep their businesses afloat, eliminating a cheap and relatively easy investment advice tool would significantly reduce the amount of investment expertise available to employees.

There were also concerns, however, about the impartiality of the computer programs, despite the regulations put in place to prevent bias. Mark Davis, the vice president of CapTrust Financial Advisors, questioned the impartiality because of a loophole that sometimes allows the plan fiduciary to input only a subset of investment options into the model. He argued that this loophole leaves a lot of room for conflicts of interest. Despite Daviss contention that investment advice from computer programs should be more carefully scrutinized, one member of the committee maintained that, while it might not be perfect, the SunAmerica model is better than no advice at all.

It was difficult to gauge the committees response to the second panels testimonies. While committee members agreed that investment advice needs to be readily available for DC plan participants, it was unclear whether they were willing to push for changes to the Education and Labor Committees bill or preferred to keep the current version.

¹ A frozen plan is one that limits some or all future benefit accruals for some or all participants.