|Pension law: Many changes, mostly
Plan participants can control the amounts of their
own salary deferrals, of course -- and they can continue to maximize
their contributions because the higher limits set into law in 2001
have been extended, thanks to this law. You can contribute as much
as $15,000 in your 401(k) this year ($20,000 if you're
50 or older), whereas otherwise the limits would have reverted to
back to the pumpkin levels of the past.
For auto-enrollment plans, the legislation also authorizes
the Department of Labor to come up with default investment options
that provide a better return than stable value or money market funds
-- the usual funds into which automatic deferrals are dumped.
Life-cycle or target-date
retirement funds, which contain a mix of stocks and bonds, are
expected to become the investment option of choice for these plans.
Advice safeguards added
The controversial part of the new law: The investment firms offering
the plans can offer advice
to workers. Some advice is better than none -- right? Well, not
if the advice serves the interests of the adviser more than the
employees. Conflicts of interest are a perpetual problem in the
financial services industry. What's to prevent a financial consultant
from steering the unsuspecting worker into a lousy fund that happens
to offer a big sales commission?
Congress thought of that problem. The new law prevents
advisers from receiving fees that vary with the investment options
chosen, so now advisers can't be compensated more for recommending
one fund over another. The alternative safeguard: Investment recommendations
must be based on a computer model that's certified as objective
by an independent third party.
"I think this really removes the incentive for
them to provide self-serving advice," says Debra Davis, benefits
attorney at Reish Luftman Reicher & Cohen. "I think it
will be good for participants, and there are sufficient safeguards
in place to protect them."
Another boon of the new law that protects workers: If you receive a match from your employer in the form of company stock, you will be able to sell it after three years of service. "This seems clearly in response to the whole Enron matter," says Davis.
The goal was to strengthen funding requirements so that workers could feel more secure about their pensions. Companies needed to be prodded to increase pension funding because thousands of plans are at risk of default. Collectively, they're underfunded anywhere from $313 billion to $450 billion, depending on which government agency does the calculation.
Plans that become insolvent look for a bailout from
the Pension Benefit Guaranty Corp., or PBGC, a quasi-government
agency suffering from its own current deficit of $23 billion.
The new law requires companies to increase funding
levels to cover 100 percent of liabilities instead of 90 percent,
as is currently required. And the provisions give companies seven
years to shore up their plans, though the clock doesn't start ticking
In the meantime, though, the cap for tax-deductible contributions increases substantially, providing companies with the incentive to shore up funding shortfalls immediately. Many may want to take advantage of the opportunity so they can avoid being deemed "at-risk," which would result in higher payments in a few years.