Senators Introduce Pension 'Nestegg' Reform Bill

February 1, 2005 ( - A bipartisan United States Senate duo on Tuesday introduced a sweeping pension reform bill containing new participant protections for company stock investments among a wide variety of other provisions.

A Senate Finance Committee  news release  said the proposal, the National Employee Savings and Trust Equity Guarantee (NESTEG) Act, was introduced by Chairman Senator Charles Grassley (R-Iowa) and ranking member Senator Max Baucus (D-Montana).

According to the announcement, the bill:

  • expands participant protections by requiring companies to allow their employees to more easily diversify out of company stock. Participants with large blocks of company stock in their retirement plans were particularly hard hit by a number of high-profile corporate bankruptcies including Enron.
  • requires defined contribution plan sponsors to give participants “adequate” investment education.
  • generally simplifies pension laws and regulations.

“The important pension protections in the NESTEG bill are one remaining area for reform. This is ‘must-pass’ legislation this year,” Grassley said in the statement. “The headlines have died down, but workers’ pensions are still too vulnerable to executive greed.”

Grassley and Baucus said in the statement that they expect the committee to also consider additional pension funding reforms in light of continued concerns about the financial health of the nation’s pension insurer, the Pension Benefit Guaranty Corporation (PBGC), which has been particularly hard hit by high-profile plan takeovers in the steel and airline sectors (See   GAO: PBGC Still in “High Risk” Status ).”We need to be sure our nation’s pension plans are fully funded,” Grassley said. “When companies fall short in their pension payments, workers end up on the short end of the stick inretirement.”

More specificially, according to a committee legislative summary, the proposal provides that:

  • for years beginning before December 31, 2006, the proposal replaces the 30-year Treasury rate with the rate of interest on amounts conservatively invested in long-term corporate bonds. For funding purposes, the maximum permissible rate will be 100% of the four-year weighted average of this rate. For plan years beginning after December 31, 2006, the interest rate used for purposes of funding requirements, PBGC premiums and determining lump sum distributions is based on a yield curve reflecting interest rates on corporate bonds of various durations.   “It’s also critically important to remove the uncertainty in our pension system by enacting a permanent replacement to the 30-year Treasury rate for pension funding,” Grassley said in the announcement. “Workers need reliable pension funding, and employers need a reliable basis on which to calculate pension payments.”
  • plans of employers with junk bond ratings will have to freeze accruals if vested benefits are less than 50% funded. These plans will also be prohibited from making lump sum payments in excess of $5,000. The freeze applies to negotiated plans on the first day of the next collective bargaining agreement. For other plans, it applies on the first day of the next plan year.
  • publicly held companies must allow workers to divest of company stock from employer contributions after three years of service and that worker contributions could be divested right away. There is a three-year phase-in for stock contributed to employer accounts in previous years, except participants who are 55 years old with three years of service can diversify immediately. Only free-standing Employee Stock Ownership Plans and single-participant plans are exempt from the requirement.
  • sponsors of defined contribution plans disclose all material information the employer is required to disclose to investors under the securities laws also be provided to workers concerning investments in company stock in the worker’s account.
  • if certain rules are followed, plan sponsors would not be liable for providing participants investment advice by a qualified investment adviser to participants in a self-directed individual account plan. Employers would be also allowed to offer qualified retirement planning services to employees on asalary reduction basis, with a limit of $1,000 per year
  • the basic PBGC premium for new small employer (100 or fewer employees) plans is reduced from $19 per person to $5 per person for the first five years of the plan’s life with a five-year phase in of PBGC premium for new plans and special rule for new plans of very small employers.

The Grassley-Baucus plan files the release of the Bush Administration reform proposal for the defined benefit pension system during a recent speech by Department of Labor Secretary Elaine Chao. The administration called for stepped up pension insurance funding, more pension-related disclosures to participants, and simplified plan funding target rules among other things ( Chao Releases Administration DB Reform Proposal ).