Experts Discuss Pension Reform Prospects

The  PLANSPONSOR  Web forum featured Nevin Adams, Editor-in-Chief of PLANSPONSOR / PLANSPONSOR .com, Mike Barry of president of the Plan Advisory Services Group, and regular PLANSPONSOR columnist, Mark Davis, partner at Kravitz Davis Sansone, Brian Graff, Executive Director/CEO of the American Society of Pension Professionals & Actuaries (ASPPA) and Fred Reish, Managing Director and Partner of the Los Angeles-based law firm of Reish Luftman Reicher & Cohen. The panel discussed provisions of the House and Senate pension bills and what the Congressional committee is likely to do in reconciling the two; although in many respects the bills match up, in many ways they are different, and some provisions are in one bill and not the other.

The bills have a strong focus on defined benefit plan provisions, and “in the end, there’s going to be a lot of stuff on the DB side that people aren’t going to be happy with,” Graff said.   Among changes likely to create issues are the contribution triggers for pension plans, alongside a new definition of funding shortfalls. There is one proposal based on a yield curve which aims at very senior workforces, and another that focuses on the financial strength and credit rating of the company in terms of determining companies whose pension funding commitment could be at risk.   Although John Boehner, Majority Leader, has publicly said he would not agree to a credit rating basis for determining at risk status, Graff says both the Senate and the Administration have strong feelings in favor of using such a standard.

However, even for financially viable companies, Barry said the bill will require more money will be needed sooner, and a firm’s ability to manage and predict funding requirements will be even more complicated. The regulation will limit a company’s ability to smooth interest rates, its ability to exploit credit balances and its ability to smooth asset returns, he said. The smoothing of interest rates is currently allowed over four years; the House proposal shortens that to three years, and the Senate proposes a smoothing period of just one year. Therefore, it appears realistic that there will be a two year compromise, either weighted or unweighted, Barry and Graff agreed.   “Even if you’re not at risk, a lot of the things in this bill are going to change people’s contribution requirements and accelerate them, depending on the circumstances,” Graff said.

The “one goodie,” according to Graff, in the defined benefit proposals is the substantial increase of the deduction limits in both the House and Senate bills. The House increases it to 150% of current liability and the Senate allows for a cushion of 80%, above 180% of current liability. The Senate bill would also repeal the combined plan deduction limit for those employers covered by the PBGC.

Further, Graff said that regarding cash balance plans, although legalizing plans retroactively would be ideal, he is confident that at a minimum there will be some clarity on a prospective basis, so that going forward the plans can have a legal status and the age discrimination issue will be resolved.

As for provisions that impact defined contribution plans, most of the panel discussion revolved around the topics of advice and automatic enrollment. Graff said that many people consider advice to be the toughest issue. The House bill offers exemptions from the prohibited transaction rules of conflict of interest in receiving advice from an investment advisor provided that a set of detailed disclosures is given; the Senate bill creates a fiduciary safe harbor if a qualified independent advisor is hired.

Reish said that both the House and Senate advice provisions offer advice on both a plan level and a participant level, and that the greatest damage can be done at the plan level with the selection of investments; though he saw less of a need to avoid potentially conflicted advice at the participant level. "I'm not opposed to financial advisors and brokers …giving investment advice," he said, "I would just like to see them giving investment advice on a level compensation environment."

Auto enrollment is promoted by both bills, which also clarify that ERISA preempts any state wage garnishment laws, and direct the Department of Labor to issue a default safe harbor. There are provisions to provide for error corrections, as well, such as when an automatically enrolled participant subsequently their contribution returned.   Graff suggested that all those components could become a reality but the biggest difference is the safe harbor. The Senate version says the employer doesn't have to satisfy the ADP test and enrolls both new and existing employees, participants and nonparticipants, beginning at 3% and increasing 1% per year up to 10% of income. Under the Senate provision, the employer has to provide a 3% nonelective contribution and has to vest their 50% match up to 7% of income in two years.

The House bill also offers a safe harbor for automatic enrollment that applies only to new hires. Participants are enrolled starting at 3% and are increased 1% per year up to 6%. It calls for a 2% nonelective contribution and a 50% match up to 6% of pay, with a two year vesting period. However, although the ADP test does not need to be fulfilled, the House bill adds a new test requiring that at least 70% of the non highly compensated employees would have to contribute to utilize the safe harbor, something Graff suggested made the provision an "unsafe harbor."

A recording of this webinar can be found HERE

Comparisons of the House and Senate bills have been completed by the American Benefits Council ( http://www.americanbenefitscouncil.org/documents/retbillchart_012406.pdf ), the Groom Law Group ( http://www.groom.com/_library/downloads/LegislationChart_000.pdf ), and the Joint Committee on Taxation ( http://www.house.gov/jct/x-13-06.pdf ).