Compliance July 26, 2005

Pension Bill Gets by US Senate Finance Panel

July 26, 2005 (PLANSPONSOR.com) - The US Senate Finance Committee has approved a pension reform proposal requiring companies to fully fund their defined benefit pension plans and giving airlines 14 years to pay off their pension obligations.
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The legislation now goes to the full Senate for a vote. The Senate Committee on Health, Education, Labor and Pensions has also held hearings and is working on a parallel pension measure, and a similar pension proposal is under consideration by the House Ways and Means Committee, Bloomberg reported.

“The fragile state of our nation’s pension plans has caught the attention of Americans everywhere,” said US Senator Charles Grassley (R-Iowa), Finance Committee chairman. The Congressional Budget Office estimates that companies underfunded their pensions last year by as much as $600 billion.

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An amendment added to the legislation Tuesday gives airlines 14 years to pay overdue pension obligations. Delta Air Lines Inc. and Northwest Airlines Corp., the third-and fourth-largest US carriers had asked for 25 years (See  Senate Pension Reforms Won’t Give Airlines Enough Time ). The rest of the 29,651 companies that offer defined-benefit pensions would have seven years to catch up on any backlog, according to the news report.

Also added to the measure Tuesday is a plan that would allow companies to offer cash-balance plans as long as they don’t discriminate against older employees. The 1,700 cash-balance plans already in existence have been in legal limbo since a 2003 federal court ruling that deemed International Business Machine Corp.’s plan illegal because benefits for younger workers exceeded those of older workers for the same employment period (See  IBM Strikes a Deal on Cash Balance Suit ).

The House version of the legislation, which is before the Ways and Means Committee, eliminates the use of credit balances for companies that are less than 80 percent funded.

The Senate measure approved Tuesday, the National Employee Savings and Trust Equity Guarantee Act, (NESTEG), would require companies to fully fund their plans or face increased penalties (See  Senate Bill Takes On Private Pension Pickle  ). The bill would also increase premiums that companies pay to the PBGC for insurance to $30 per plan participant per year from $17.

More information about the US House Republican pension plan is  here .

More information about the Bush Administration’s pension proposal is  here .

Benefits July 25, 2005

Hewitt: K Plan Cashouts Still Common

July 25, 2005 (PLANSPONSOR.com) - A significant number of workers are taking their 401(k) money and running when they leave their companies, according to a new study.
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A Hewitt Associates news release said that 45% of the nearly 200,000 K plan participants studied took a cash distribution upon their departure, while 32% stayed in the plan and 23% rolled over into another qualified plan or an IRA.

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The Hewitt data found a direct correlation between age and tenure and employees’ decisions to cash out of their 401(k) plans. The highest incidence of cash distributions was among young employees (66%) age 20 to 29. Older workers with more years of service were more likely to keep their assets in the plan or roll over to another plan or IRA. Still, more than 42% of workers age 40-49 elected to cash out of their 401(k) plans upon leaving their jobs.

Not surprisingly, Hewitt’s study showed that size of balance was a factor when it came to workers’ tendencies to cash out of their 401(k) plans. Nearly three-quarters (72.5%) of workers with 401(k) plan balances under $10,000 took a cash distribution. When 401(k) plan balances were between $10,000 and $20,000 at termination, cash-out rates were much lower. Still, nearly a third (31%) of these employees elected to take their 401(k) distribution in cash.

“Retirement security relies not only on employees saving in their 401(k) plan, but on them actually preserving their retirement wealth when they leave their company. Our findings show that too many workers are not looking at their 401(k) savings as long-term in nature, but are instead using termination of employment as an opportunity to spend this money,” said Lori Lucas, Hewitt director of participant research in the news release. “With fewer workers tending to remain at one company until retirement, employees may become ‘serial consumers’ of their 401(k) savings, which can have serious consequences when it comes to their ultimate ability to reach their retirement goals.”

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