Under the two major provisions of the bill, introduced by Representative Peter Deutsch (D-Fla.) in conjunction with Representative Gene Green (D-Tex.), employees will be confined to contributions of 10% to company stock programs. And, they would be allowed to transfer out of company stock once they have held it for three years.
Both conditions would be required in order for a plan to retain its qualified status under the bill. The provisions would be applied to acquisitions of stock after the bill’s passage.
The bill does not address company matches; one of the reasons Enron’s employees watched their 401(k) accounts self-destruct as the company’s stock fell. Elizabeth Assey, press secretary for Rep. Deutsch told PLANSPONSOR.com this is intentional.
“We don’t want to create a disincentive for companies to have retirement programs,” she said. “We want the employee pre-tax contribution to be limited in the company and the one thing the legislation allows for is that the employer match is unaffected.”
David Wray, president of the Profit Sharing Council of America took issue with the presupposed limits.
“Structurally [the bill] doesn’t work because at some point any plan that has a stock program will disqualified under the system,” he said. “What if employees in a down market put 10 percent of their money into company stock?” he queried. “If the stock skyrockets then employees are going to be over their 10 percent contribution and the plan will be disqualified.”
Mark Ugoretz of the Erisa Industry Committee agreed.
“Not only will employees be over their limit but they will be forced to disinvest themselves of stock that they purchased at a high cost for a lower cost,” he said. “Or, they could be forced to sell the stock and be hit with a very substantial tax liability.”
Ugoretz mused that the Pension Protection Act mirrors Senator Barbara Boxer’s (D-Calif) bill in its ambition. But it ultimately will have difficulties reaching the floor for the same reasons the Boxer bill did not succeed.
“The old Boxer bill died because it was employees themselves who felt they didn’t want to be constrained by the government on the amount of investing they could do in a company they believed in,” he continued. “The 10 percent rule was deemed particularly arbitrary for plans that had more than one type of retirement vehicle and, it barred employers from providing employees with stock that they wanted to hold.”
But more than this, Wray and Ugoretz conceded that the new legislation is simply premature.
Both concluded that the legislation was drawn with the Enron fiasco in mind and intend to set limits on 401(k) plans that will ultimately not change how they work. Beside this the details of what really happened at Enron are still being investigated. Wray said that once all of the facts have been gathered thorough analysis can begin.
“This bill is modeled on what is an unusual set of transactions by one company,” said ERIC’s Ugoretz. “Bad facts make bad law.”