|
|
|
|
We have tons of info here. Use our Search function to find it
fast....
|
|
|
Article added or updated:
09/05/2011 |
Big Changes For Pensions
Ahead - Changes to the
401(k) Plans
|
Added
02.01.06, 10:00 AM ET
If, like the majority of U.S. workers, your
only pension plan is a 401(k) , you might not have paid much notice to
the pension reform bills the House and Senate passed late last year.
|
|
|
After all, debate about these bills has focused
on how Congress can prevent more companies from dumping their
underfunded defined benefit pension plans into the Pension Benefit
Guaranty Corp.'s lap. The PBGC’s $23 billion deficit is likely to grow
if bankrupt carriers Delta Air Lines (otc: DALRQ ) and
Northwest Airlines (otc: NWACQ ) follow the lead of US Airways
(nyse: LCC ) and UAL (otcbb: UALAQ.OB
) and abandon their plans to the government insurer. (When United
emerges from bankruptcy this week and begins trading on Thursday on
Nasdaq as UAUA, the PBGC will own a big chunk.)
The PBGC’s woes should worry you as a taxpayer,
but they don’t affect your 401(k) . There’s no government guarantee for a
401(k) --your losses are your problem.
Still, some big changes for “defined
contribution” plans will be on the table, too, when House and Senate
negotiators begin to hammer out a compromise pension bill, possibly in
late February. The final legislation could boost the number of workers
participating in 401(k) s, but reduce the amount some employers
contribute to workers’ accounts.
Here are some key issues:
Employee Contribution Limits. The House
bill, but not the Senate version, would make permanent the
low-income-savers credit and the higher 401(k) and Individual Retirement
Account contribution limits that were part of the 2001 tax cut. Under
current law, the credit expires at the end of 2006 and the higher
contribution limits at the end of 2010. While these tax breaks are
popular, the $30 billion cost for making them permanent means they
aren’t a sure thing.
“By a magnitude of ten, permanency is the
highest priority,’’ for employers sponsoring 401(k) s, says Ed Ferrigno,
vice president for Washington Affairs of the Profit Sharing/ 401(k) Council
of America. “This could very well be the best chance to get
permanency,’’ he adds.
Employer Contributions. Both the House
and Senate bills remove possible legal barriers to “automatic
enrollment” in 401(k) s and reward employers who adopt automatic
enrollment by chopping the amount they must contribute to workers’
pensions to avoid “nondiscrimination testing.” With automatic
enrollment, employees must opt out of the plan, rather than opting into
it. If they do nothing, some percentage of their pay--at least 3%--is
diverted into a 401(k) and invested in a mix of funds or a balanced
fund.
Automatic enrollment is a no-brainer; according
to the Retirement Security Project, it typically raises 401(k)
participation rates from 75% of eligible employees to 85% to 95%. That’s
critical given that most of today’s younger workers, even those employed
by corporate giants, will have only defined contribution 401(k) s and not
traditional pensions to fall back on. Just this month, IBM (nyse:
IBM -) announced it will freeze its defined benefit plan and offer only
401(k) contributions.
What about nondiscrimination testing? It’s an
arcane business with a simple aim: to make sure managers have an
incentive to promote the 401(k) plan to lower-paid workers. The test
means that if lower-paid workers don’t save, highly compensated
employees (those earning $100,000 or more in 2006) can’t put as much
money in the 401(k) .
Under current law, a company can escape the
nondiscrimination test by contributing 3% of pay to every employee’s
retirement account, whether or not he saves, or by offering to match the
first 3% of salary a worker saves dollar for dollar, and the next 2% at
a 50% rate, for a maximum 4% match. The House bill would allow an
employer who automatically enrolled new hires in the 401(k) to escape
the nondiscrimination test by putting just 2% of pay away for all
workers, or by offering just a 50% match on the first 6% saved--for a
maximum 3%. (The Senate would allow a somewhat lower match, too, but
only if all employees--not just new ones--were automatically enrolled.)
“The legislation does enough to encourage
employers to use auto-enrollment without this unnecessary
nondiscrimination carrot,’’ says J. Mark Iwry, a senior fellow with the
Brookings Institution and leader of the Retirement Security Project who
oversaw pension policy at the Treasury until 2001.
Investment Advice. The House, but not
the Senate, would allow financial services companies that administer
401(k) s, such as Principal Financial Group (nyse: PFG ), Fidelity
Investments and the Vanguard Group, to provide participants with
investment advice--including recommending their own funds.
The idea, pushed by House Education & the
Workforce Committee Chair John Boehner (R-Ohio), is opposed by
independent financial advisers, as well as consumer groups, who worry
about possible conflicts of interest and abuses. Boehner argues that
participants need access to more advice, and any conflicts and fees
would have to be disclosed up front. But a whole mini-industry of
separate advisers, including mutual fund rater Morningstar (otc:
MORN
), is already offering participants advice. Venture
capitalist-backed Invesmart, will even manage a participant’s 401(k) for
just $10 a month.
More than just management of 401(k) s is at
stake here. Cerulli Associates estimates that this year $221 billion in
401(k) money will roll over into IRAs, and that annual rollovers will
hit $387 billion in 2010. Moreover, according to Cerulli, rollover money
has been the biggest source of cash for managed mutual fund accounts. If
financial service companies can advise employees on investing their
401(k) s, that could give them the inside track on some lucrative
rollover business, too.
|
|
As always, please check with your tax professional,
CPA or lawyer
prior to acting on any advice found here. We do NOT dispense advice on
any articles contained here.
Legal Disclaimer
© Copyright 2003-2011. Please do not reproduce or copy without written permission.
SelfEmployedWeb. All Rights Reserved |
|
|
|
