Speaking on safe harbor provisions in the bill for auto plan features, such as automatic enrollment and automatic deferral increases, Dallas Salisbury, President of the Employee Benefit Research Institute (EBRI), said, “That of the entire bill, may be the most important provision, may have the greatest potential, for increasing retirement savings for individuals.”
In addition to the safe harbor provisions for auto plan features, making the EGTRRA (Economic Growth Tax Relief and Recovery Act) provisions permanent was “a very, very helpful change for everybody,” Brigen Winters, Principal at the Groom Law Group, told PLANSPONSOR.com. Jan Jacobson Director, Retirement Policy, American Benefits Council, also applauded the EGTRRA provisions. “We think that’s an important aspect of improving the savings rate,” she said.
Larry Sher, Director of Retirement Policy at Buck Consultants, said that one thing employers have been anxious to nail down is their funding requirement for 2006. The house bill will extend for two years the same requirements for determining minimum contributions that were in effect for 2005. Passing the bill will help companies finalize 2006 funding numbers and give them a good idea for what their 2007 contributions will be, Sher told PLANSPONSOR.com. He said it is good that legislators are giving employers time to prepare for new funding rules.
Frank McArdle, Principal with Hewitt Associates, said the most significant provision included in the House bill was the resolution to give employers the green light to offer investment advice to their pension plan participants. However, McArdle said the provision “doesn’t get employers off the hook,” warning that they will still have to be prudent when selecting plan providers.
Salisbury says, due to the advice provision, many more employers will offer participants third party advice. That is a good thing, according to Sher, who points out that, as DC balances are getting bigger and as DC plans become the only source of retirement income for employees, the need for education is getting greater.
Ethan Kra, Chief Actuary at Mercer Human Resource Consulting, told PLANSPONSOR.com that the pleasant surprise in the house bill was something that was added on in conference committee: “amortization of gains as well as losses.” He said this was significant to balance the funding rules.
There is concern that the bill will help push employers over the fence when deciding the future of defined benefit plan offerings. Particularly with the loss to some plan sponsors of the credit balances and changes in smoothing rules on the DB side, and the addition of the auto enrollment feature and the making permanent of the EGTRRA provisions on the DC side, Winters said, "I think the bill will help facilitate the trend of plan sponsors moving from DB to DC."
DB plan sponsors might be a winner or a loser - depending in large part on their funding status, according to Winters. Some might actually fare worse under the bills new funding targets and definition of "at risk" plans than they do current under deficit reduction funding rules. When the bill is fully phased in, some plans might be in a 100% funding target at the same time they no longer have a credit balance to use from overfunding from a prior year.
"Those credit balances are real," Jacobson said. "That's real assets there." Not having a credit balance to factor into one's pension calculations could potentially drop a DB plan into the new "at risk" funding targets, she said.
In contrast, Kra contends that credit balances survived in pretty good shape. He said the rule was a reaction to the high profile plans that had been dumped on the plate of the PBGC.
In theory the funding changes are those that would have the greatest potential for affecting employer decisions on DB plan status, according to Salisbury. However, he said one has to consider recent Financial Accounting Standards Board (FASB) accounting regulations, which he says will have a far more significant impact to sponsors than what is in this legislation.
Salisbury says he does not know that any one provision is powerful and negative enough to have the impact of causing employers to drop DB plans. An employer looks at all factors, this law plus FASB rules, competitiveness in workplace, legal risks; New factors can push employers over the fence either way. However Salisbury contends that passing of the bill will be a time that employers, in light of all factors, will reassess their DB position and decide what will meet their company's objectives.
Kra contends that the new funding rules will affect investment strategy for plan sponsors. They will invest more in long-term bonds than in equities because of the reduction in volatility, he says. The old rules encouraged volatility, and the new rules will penalize volatility.
As for hybrid, or cash balance, plans, legislators clarified legal issues going forward but did not include a retroactive provision for legal standing of plans already in place. Sher told PLANSPONSOR.com, "No branch of government so far has been willing to step up to the plate" concerning legality of cash balance plans. He expressed disappointment that Congress is allowing litigation to persist.
The result of current litigation is what Salisbury thinks will ultimately affect employers thoughts on legality of cash balance plans and whether they keep or adopt them. If IBM loses its appeal in its cash balance litigation, employers will be nervous in spite of legislative clarification, if IBM wins, that will increase employers' comfort brought about by this legislation, he said.
Kra said the fact that "Congress decided to punt on the issue instead of address it appropriately" might drive employers that have already adopted cash balance to terminate. "That might be more significant than the funding rules as far as pushing employers to terminate," he said.
Retirement plan professionals PLANSPONSOR.com spoke with expressed mixed opinions about the fate of the bill in the Senate this week. At the last minute the House pulled out controversial tax provisions into a separate measure from the pension reform.
The goings-on in the conference committee with the tying in of the tax issues was "purely politically motivated. It's a tactic that potentially could result in our not having a pension bill," according to Bob McAree, senior vice president at The Segal Company.
Sher expressed concern about that as well, saying it is possible that the Senate will not consider the pension bill and get bogged down on the tax measure until its summer recess. However, he also pointed out that Senate leaders are all in favor of a bill and probably the last thing they want is for someone to throw out an amendment that will send the bill back to conference.
The nature of the legislative process is precisely why Salisbury says it is likely we will not have a resolution on pension reform until later in the year. He points out that this is a House bill and not a conference agreement, and also that there has been no answer on whether the president is likely to sign this version of the House bill. "It will take a unique step of bipartisan agreement to enact a bill this week, which is not inconceivable, but it is highly unlikely," he said. He also noted that, with the issue of the tax provisions up in the air, the Senate could simply run out of time.
In the mean time, if the legislation is not passed this week, the summer break will be a good time for sponsors to make a final effort to influence provisions of the bill by letting Senators and Representatives know of their concerns, Sher stated. He also pointed out that having an actual bill on the table could help sponsors think of their planning issues as they study specific provisions.
"From my perspective at this point, I think we would all be best served with getting this or something very much like it passed. It would really be bad if this thing lingers and we have more uncertainty. Employers want to know what the rules are so they can study them, make changes and move on. We have to move on - and this uncertainty - we need to get past this," Sher said.