The Washington Winds: The 'Death Knell' of DB

June 28, 2006 ( - CHICAGO - Following the political winds in the post-Enron and WorldCom world that are now focused so strongly on 401(k) plans, lawmakers currently hashing out a sweeping pension reform measure may also be marking the beginning of the end of the defined benefit system.

A panel of long-time observers of the political scene in Washington, D.C., offered this key conclusion Wednesday as PLANSPONSOR’s national conference, PLAN DESIGNS 2006, opened at a Chicago hotel.

What might quicken the DB system’s demise is the Congressional conference committee’s version of the pension reform measure and lawmakers’ consideration of the legislation, said attorney Steve Saxon, a principal with the Washington, DC law firm Groom Law Group and an Employee Retirement Income Security Act (ERISA) expert.

Increasing numbers of plan sponsors with DB plans will follow a steady trend of recent years of freezing their traditional pensions in favor of an often-beefed up defined contribution program.

“They’re not going to suffer the reputational impact they used to,” Saxon asserted. “Mark my words, the flood gates (of DB plan freezes) will open. It’s the death knell of the DB plan. I think it’s a sad day.”

Saxon and other members of a panel discussing the current Washington scene for pension issues agreed that the work of the US House-Senate conference committee and other Capitol Hill pension policy discussions are taking place against the backdrop of a significant shift away from the focus of finding long-term solutions for the traditional pension system. More than ever before, lawmakers are refocusing on DC alternatives as the nation’s key vehicle for retirement funding.

“What we have in Washington is crisis management, but it’s not a national retirement policy,” Saxon said. “(Lawmakers) never look at the long term; they just try to solve the immediate problems.”

“Whether we like it or not, the 401(k) is becoming the primary retirement vehicle for the American worker,” Saxon said.

Bridget Flynn, senior director pension tax policy, Nationwide Office of Federal Relations, told the PLANSPONSOR conference opening session that lawmakers on the pension bill conference committee have been focusing mostly on DB issues and are now expected to turn their attention to more DC plan proposals.

Among other issues, Flynn said the current version of the reform bill will include a section on hybrid plans, which she said will likely offer plan sponsors prospective but not retrospective relief from lawsuits over DB plan conversions.

Conferees are also currently finalizing “at risk funding” rules, Flynn said, which will define plan funding levels that will designate a plan for special “at-risk” status. Among other things, at-risk companies are expected to be barred from increasing pension benefits until their funding levels are brought more into line. Finally, she said she thinks the eventual legislation may finally settle the issue of when plan sponsors can offer investment advice – an area, as Flynn pointed out, that is still the subject of sharp disagreement between the Senate version and the House version.

Both Flynn and Olena Berg Lacy, a former assistant Secretary of Labor, predicted an eventual pension bill would almost certainly deal with the issue of auto enrollment – a plan design issue that has significantly gained popularity in recent months as plan sponsors look for ways to drive up enrollment and deferral rates.

“This is a very, very popular issue in Washington,” Flynn said. “No one doesn’t like auto enrollment in Washington. There is no way auto enrollment is not going to be in that bill.”

Lacy gave a strong endorsement for auto enrollment, pointing out that plan sponsors do not have to wait for the pension reform measure to come out of Congress before making their move. “People, on the assumption of that (passage of the pension bill), can start moving down this path,” Lacy said. “There is a lot of reason to move on with this. It’s a great idea.”

She pointed out that the Department of Labor (DoL) is already working on a safe harbor provision for plan sponsors’ selection of a default investment option into which auto enrolled employees are typically placed. She said DoL officials will sanction the selection of a:

  • Balanced fund,
  • Lifecycle fund, or
  • Managed Account.

Plan sponsors might even be able to get away with more than one fund choice – if they can justify the move. “You are going to have to come up with some pretty strong reasons why that is appropriate for your plan,” Lacy told the audience.