The law offers some encouragement to employers and workers, but the regulatory and technical guidances underlying the poorly written law are still to come. And the decline of defined-benefit plans seems to continue unabated.
Congress completed years of effort with enactment of the Pension Protection Act of 2006 in August. The far-reaching legislation will allow employers to move forward in many areas where clarity and flexibility have been desired for years.
The most significant changes -- those affecting the greatest number of employers and workers -- relate to defined-contribution plans. Next are the extensive funding-rule changes for all single and multi-employer defined-benefit plans, followed by the declaration that cash-balance plans can be legally designed prospectively -- but that those now in existence may still face hurdles. And provisions that will allow well-funded defined-benefit plans to use funds to secure retiree-health benefits will be greeted by many very large firms with joy.
There is a long road ahead, however, as the legislation requires many technical corrections and a large number of regulatory projects by the Internal Revenue Service and the Department of Labor.
Task forces are already working, but they are finding a poorly written law that looks like the sausage that is famous in Washington.
On the good news side, however, the passage eliminates the prospect of Economic Growth and Tax Relief Reconciliation Act of 2001 limits or the Roth 302(k) being rolled back in 2010. It allows the IRS to proceed with regulations and determination letters on cash-balance plans after a hiatus that has lasted for years, confirms that auto-enrollment is legal and provides the go-ahead on a number of default features for defined-contribution plans, such as contribution escalation and default investment into diversified funds (with the Department of Labor expected to issue final rules in the fall).
Some in Congress hope that this legislation will end the decline of defined-benefit plans, while others subscribe more to the administration position: that the important issue is keeping whatever promises are made, not what type of plan they are made by.
The recent announcement by DuPont that the company will soon move all new employees into an enhanced (k) plan, while cutting the accrual rate of the existing DB plan to one-third its former level for current workers, suggests that passage of the legislation will not reverse trends driven by financial analysts and markets, and the FASB and GASB accounting standards regulatory rush.
Clearly, Congress and the president will not object to the direction the accountants are heading, because "mark to market" is where the administration wanted PPA to end up.
The United States has always had a highly mobile workforce, and the largest employers, which once had lower turnover and longer employee tenures than most of the workforce, are now moving to the mean.
High turnover hands a clear advantage to the defined-contribution plan -- if the objective is using plans to attract and retain new talent. Small employers always emphasized these plans, which is why there were 200,000 defined-contribution plans compared to 100,000 defined-benefit plans when ERISA was passed.
Small employers now sponsor more than 600,000 defined-contribution plans, and they are now becoming the dominant form for large firms as well.
As one recent report noted, only 35 of the Fortune 100 now have a defined-benefit plan that is still awarding new accruals. DuPont, IBM, Verizon, and others, are in that "still accruing" category, as they have not yet moved to the already announced hard freezes.
Congress and the president have enacted a law that will slow the further funding decline of troubled single and multi-employer defined-benefit plans, has the potential to provide a life-saving line for cash-balance plans if employers want them, and may increase the revenue stream from existing plans for the Pension Benefit Guaranty Corp.
The PPA is likely to increase the probability that promises that have already been made will be kept and increase the number of individuals who will build balances in 401(k) plans, but it will move the nation quickly away from the original purpose of Title IV of ERISA: to encourage the growth and development of defined-benefit plans.
It is my father's retirement for fewer and fewer who reach age 65-plus. My dad, who just turned 93, has two defined-benefit annuities and fully employer-paid retiree-health insurance. I will not experience my father's retirement. Will you?