Legislation aimed at streamlining cumbersome pension
rules faces strong opposition from participant
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
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
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
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 employeeto 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
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.
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
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
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
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 proposedit 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."top