Saxon Angle | Published in January 2009

Watch Words

Will "change" come to the retirement system?

By Steve Saxon | January 2009
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"Change" was the watchword of the presidential election, and change, whether intended or not, is likely to come to the retirement benefits industry in 2009 as a result of the ongoing crisis in the financial markets. Given this turmoil, and the control Democrats will have in the Senate, House, and 1600 Pennsylvania Avenue, the pathway to implementing change should be easier. We survey some of the possibilities below.

Mandatory IRAs

While changing the U.S. retirement system was not a high-profile issue in the election (as opposed to health-care reform), the Obama-Biden campaign's signature proposal was a mandatory payroll-deduction IRA program for employers that do not offer a qualified retirement plan (See  IMHO: Their Own Devices ).

The program would require automatic enrollment and default investment of deferrals; employees could opt out in writing, or continue to participate. Advocates argue that such programs would increase participation (the Obama campaign estimated that participation among low- and middle-income employees would increase from 15% to 80%) and reduce the cost barrier perceived to prevent many small employers from offering retirement plans.

Such programs, however, may create a disincentive to establish or maintain qualified plans, which are much more complex and expensive than IRAs. An employer-sponsored plan provides participants with oversight of investment options and service providers­ by a fiduciary held to strict legal standards of prudence and loyalty and, often, employer matching contributions and plan-provided participant education or investment advice. IRA holders receive none of these benefits. The question is what effect an expansion of IRAs will have on the continued viability of our employer-based retirement system.

Funding Issues

Lawmakers on Capitol Hill have been negotiating relief for defined benefit pension plans from the funding requirements instituted by the Pension Protection Act of 2006 (PPA). The meltdown in the financial and credit markets may cause many otherwise healthy plans to fall within the PPA's provisions, potentially triggering notices to participants and restrictions on distributions, among other things.

Current proposals would permit pension plans to smooth out unexpected asset losses and ease the application of the new funding rules by providing transitional relief for plans at and below the phased-in funding threshold (92% for 2008, 94% for 2009), and permit plan sponsors to elect to freeze temporarily the status of an endangered or critical plan at the same funding status held in the immediately preceding plan year (See  Study Suggests More Pension Funding Help Needed ).

With the anxiety level among American workers at record-high levels, the possibility that workers' lump-sum benefits may be restricted will not be received warmly. Hopefully, this legislation will remove the restrictions on lump-sum payments. It does not look as if this legislation will be enacted this year.