By Kathleen Day
Washington Post Staff Writer
Sunday, August 20, 2006
The pension legislation President Bush signed last week will make the most significant changes to U.S. retirement laws in three decades, affecting workers of every age, from graduates on their first job to employees who are about to retire.
A key aim of the Pension Protection Act of 2006 is to give the 44 million active and retired workers who have earned a traditional pension a greater chance of actually receiving all of it when they retire. For these workers, the law is intended to make companies adequately fund traditional pension plans, stop using bookkeeping that makes plans seem healthy when they are not, and bar executives from promising future benefits they can't pay for. And it forces companies with financially ailing pensions to contribute higher premiums to the federal insurance program that, when pension plans fail, pays workers a portion of what they were due.
One concern among experts is that the changes may have the unintended effect of pushing companies to freeze or drop pensions rather than bear the additional cost of fully funding them and paying higher federal insurance premiums.
The law also gives financially troubled airlines, and some large defense contractors, more time to meet the new standards, largely out of fear that without such a break, the firms might walk away from their pensions, dumping them into the federal insurance plan and raising its costs.
In addition to shoring up the traditional pension system, the new law seeks to address newer forms of retirement plans offered in the private sector. During the past 20 years, many companies have shifted away from traditional pension plans, which offer defined benefits, and toward savings plans such as the 401(k), into which employers make set, or defined, contributions.
Experts who have studied the 900-page legislation say that different age groups benefit in different ways. For example, they say the new law is designed to spur younger workers to save more so they will have something to retire on. For these employees, the law provides incentives to save earlier and more often, and in sounder ways. Meanwhile, middle-aged and older workers will gain more from efforts to stabilize traditional defined-benefit plans. Here's a look at how the law affects different age groups, and at some issues it fails to address:All ages:
· The law makes it easier for financial firms that manage companies' 401(k) plans to also advise workers on how to invest their funds. It has a safeguard against conflicts of interest in that arrangement. It requires any manager who recommends financial products, and receives commissions on them, to rely instead on computer-generated recommendations.
· Lets workers leave benefits to a domestic partner or dependent, not just a spouse. And workers could draw on retirement funds for medical or financial emergencies involving domestic partners or other beneficiaries.
· Prevents employers from forcing workers to invest too heavily in company stock rather than in more diversified holdings.Younger Workers (20 to 35)
· May be the biggest winners under this bill because they will be in the workforce the longest and have the most time to save, according to the National Center for Policy Analysis.
· Will find it easier to participate in 401(k) plans. The new law encourages employers to offer automatic enrollment, allows for contributions to automatically increase as pay increases, and makes it possible to automatically diversify holdings. Workers can elect to opt out -- a big change from the current system, in which they must opt in. The nonprofit Employee Benefit Research Institute estimates that automatic enrollment will result in a 92 percent participation rate, compared with today's 66 percent. Low-income workers, EBRI estimates, will particularly benefit: Rates of participation by this group are expected to more than double, to 91 percent.Middle-Aged Workers (35 to 60)
· Will be helped by the 401(k) provisions but not as much as younger workers because they have less time to save and join a retirement plan, according to EBRI.
· Will also be helped by efforts to shore up traditional pensions, in which they are more likely than younger workers to be enrolled.
· Will find it easier to save for college, as several expiring laws that promoted savings were made permanent. The contributions to retirement accounts will be permitted to rise with inflation.Near-Retirement Workers (60-plus)
· Will benefit more than any other group from the provisions on traditional pensions, according to the AARP.
· Should receive more information from companies about the health of their pension plans.
· Should see companies put more money into underfunded pensions.
· Should have new protections against employers that would promise increased benefits even though a plan is funded.Unresolved Issues:
· The law falls short in several areas, according to retirement groups, by not requiring companies, when employees retire, to automatically invest their 401(k) money in annuities, financial plans that promise to pay a set amount each month for as long as an employee lives. The National Center for Policy Analysis says such programs are vital to prevent retirees from exhausting savings too soon and then having to live only on Social Security.
· Another concern for some consumer groups is that the bill makes it easier for hedge funds, which are largely unregulated investment funds, to manage larger portions of pension funds without triggering regulatory scrutiny.