Magazine

Published in April 2000

Miles To Go?

By Judy Ward | April 2000

Legislation aimed at streamlining cumbersome pension rules faces strong opposition from participant representatives

Legislation aimed at streamlining cumbersome pension rules faces strong opposition from participant representatives

» What about workers?
» A 25% chance?

While pension reform legislation has passed both houses of Congress, it may become the victim of political squabbling and criticism that the changes would hurt rank-and-file workers.

The legislation in question is the outgrowth of the Retirement Security for the 21st Century Act, sponsored by Representatives Rob Portman (R-Ohio) and Benjamin Cardin (D-Maryland), and the Pension Coverage and Portability Act, sponsored by Senators Bob Graham (D-Florida) and Chuck Grassley (R-Iowa).

The House of Representatives approved the pension reforms (House Bill 3081) in March, as part of a move to increase the minimum wage. The Senate had already passed similar legislation (Senate Bill 625) as part of a bankruptcy bill. The key provisions would restore annual contribution limits that have been repeatedly lowered by Congress in recent years, and offer sponsors some simplification of Byzantine plan-administration rules. But with Democrats and Republicans continuing to fight over larger tax issues, the Clinton administration has yet to throw its support behind the bills."We are hopeful that [the legislation] will become law," says Geoffrey Manville, director of membership and communications at the Washington-based ERISA Industry Committee. "But it is frustrating that even though the proposals enjoy wide support, their fate is tied to other provisions."

Critics, meanwhile, say the legislation would allow certain business owners to cut their contributions to employees' retirement accounts by lowering their company's percentage contribution rate while maintaining the dollar contribution to their own account.

These opponents worry about provisions that would raise the maximum salary upon which qualified plan contributions can be based from $170,000 to $200,000. The Washington-based Center on Budget and Policy Priorities offers this scenario: Say a business owner making $250,000 wants to have the company contribute $11,000 a year to his or her pension. Under current law, that means the owner has to set the company's pension contribution rate at 6.5% of pay (since 6.5% of the $170,000 limit is $11,000). But the higher $200,000 limit would allow the owner to reduce the company's contribution rate to 5.5% and get an $11,000 contribution to his or her account.

"Not only does that give benefits to the top end, but it facilitates dropping the contribution to the lower end," says Peter Orszag, who heads Belmont, California-based policy-consulting firm Sebago Associates. James Delaplane, vice president of retirement policy at the Washington-based Association of Private Pension and Welfare Plans, believes it is far more likely that business owners would want to increase the dollar contribution to their own retirement accounts, however.

Both the House and Senate minimum wage/tax bills contain provisions that would:Boost contribution and benefit limits. Maximum 401(k) deferrals would rise to $14,000 from $10,500, and the contribution limit on defined contribution plans would increase to $40,000 from $30,000. The defined benefit plan benefit limit would increase to $160,000 from $135,000. And the limit on compensation that can be used to determine benefits in qualified plans would grow to $200,000 from $170,000.

Make it easier for participants to "catch up." Current regulation limits contributions to an employee's defined contribution account-from both employer and employee—to 25% of compensation. The percentage would increase to 100%, up to $40,000. And people 50 or older could make an additional catch-up contribution annually of up to 50% of the applicable contribution limit to 401(k), 403(b), 457, and SIMPLE plans. (So, for example, someone eligible could contribute up to $7,000 extra to a 401(k), or 50% of the proposed new $14,000 limit.)

Permit faster vesting. Employees would be eligible for vesting of matching contributions from their employers in three years, rather than the current five years.

Allow more rollovers. Current rules prohibiting participants' rollovers from one type of retirement plan to some other types, such as from a 401(k) to a 403(b), would be eliminated.

Kill the "same desk" rule. This would let employees roll over their 401(k) balances when they move to new employers as a result of a merger or business sale.

Ease some of the administrative burden. It would repeal the 155% of current liability funding limit for defined benefit sponsors and streamline top-heavy rules that are used to determine whether key employees are getting an excessive portion of plan benefits. Also, the multiple-use test used in nondiscrimination testing would be repealed, while the separate-line-of-business test (which is used in nondiscrimination testing by companies with more than one business line) would be simplified.

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What about workers?

The House and Senate legislation's fans say it would make life easier for sponsors. "The rules that plan sponsors will have to navigate will be more rational," says APPWP's Delaplane.

The legislation would also encourage small-business owners to start plans, supporters say. In addition to the higher contribution limits that would make a plan more attractive to the executives themselves, for example, it would reduce Pension Benefit Guaranty Corporation premiums for small companies.

Critics say it is wishful thinking that this would lead to broader retirement coverage. "It does not really require that there be any increased benefits for the rank and file," says Daniel Halperin, a Harvard Law School professor. "There is a mistaken assumption that, just because you have more plans, you have more coverage. This may lead to more savings by business owners, but I do not think that is the right goal."

He and some others contend that, rather than a badly needed plan for increasing retirement savings of lower- and middle-income workers, this is largely a tax break for well-off people; critics point to the higher contribution and benefit limits in particular. "An analysis suggests that 97% of the benefits will go to the top 20% of the income distribution, and 86.6% will go to the top 5%," says Orszag. "By any standard, that is a very skewed distribution of benefits. Even more problematic is that it could induce a decline in pension coverage for rank-and-file workers."

The legislation also has some grassroots opposition. "Many IBMers are upset because they believe the legislation can be interpreted in a way that allows corporations to terminate early retirement subsidies and could perhaps even allow companies to do that for employees who already have retired, but who are not age 65 yet," says Janet Krueger, a former IBM employee who has been among the leaders of an effort to safeguard the pensions of the company's retirees.

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A 25% chance?

The pension provisions have only about a 25% chance of becoming law this year, Delaplane predicts. For one thing, pension reform "is attached to a minimum-wage bill and a bankruptcy bill," Orszag says. "You cannot analyze the likelihood of passage only on the basis of the pension provisions. Last year, almost everyone thought this stuff would pass, and it did not."

The issue is also tied up in a larger budget debate among Democrats and Republicans. "If the White House signs off on something, it is not going to be what the Republican Congress proposed—it will be a compromise," says Randy Hardock, a Washington-based partner in the law firm Davis & Harman and former tax counsel to the Senate Finance Committee. Adds Delaplane, "Republicans would have to be willing to pare back what they have significantly." Most vulnerable, he says, are the restoration of benefit and contribution limits. And the legislation may need to address criticism that it does not help the rank and file, perhaps by adding a government match for lower- to middle-income people.Once the election-year dust settles, however, there is always next year. "If you ask me to look at a two-year time horizon, I would come up with a much higher probability," Hardock says. "Many of the proposals have gotten broad support from Democrats and Republicans. The seeds have been planted."

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