Grassley Highlights Worker Savings, Pension Preservation Provisions in Senate Pension Bill
WASHINGTON – Sen. Chuck Grassley, chairman of the Committee on Finance, today said the pension reform legislation advancing through Congress contains common-sense provisions to boost workers’ savings, such as encouraging companies to automatically enroll their workers in 401(k) plans, bolster retirement plan diversification rights, and simplify rules to encourage employers to offer pension plans.
“We need a national red alert on retirement savings,” Grassley said. “The national savingsrate is at an all-time low and fewer companies offer pension plans than in decades. Congress needsto enact changes that encourage more employers to offer pension benefits and protect the existingbenefits of millions of employees. We have to help make sure that a secure retirement is a reality,not a pipe dream, for American workers.”
Grassley is a key author of the Pension Security and Transparency Act of 2005 (S. 1783),which the Senate passed on Nov. 16 on a vote of 97 to 2. The House has not yet passed its versionof the bill, which contains similar savings provisions, such as the automatic 401(k) enrollmentprovision. Pension-boosting provisions in the Senate’s Pension Security and Transparency Act of2005 include:
Automatic 401(k) enrollment. The bill encourages employers to offer the automaticenrollment option by helping them meet rules ensuring equal treatment of highly compensated andnon-highly compensated employees. Under the bill, employers’ plans have to include at least 70percent of non-highly compensated employees versus highly compensated employees, and must treatboth categories equally in terms of contributions made and matched.
The bill also gives companies some protection from lawsuits if the investment options chosenare “reasonable.” Under current law, some companies are reluctant to use automatic enrollment forfear that employees whose investments lost money would sue. As a result, the companies use ultraconservativeinvestment options that offer very little return for workers.
Now, 19 percent of large employers automatically enroll workers, according to the globalhuman resources services firm Hewitt Associates. Grassley said experts estimate a significantincrease in automatic enrollment if the pension bill is enacted.
“Millions of employees have access to 401(k) plans but many of them don’t enroll,” Grassleysaid. “That’s too bad because these plans offer a good way to save money. They let workers setaside a percentage of their salary on a pre-tax basis. Companies often match a percentage of theemployee’s contribution. That match is really a salary increase. The automatic enrollment optionwill make sure workers don’t miss out on a very good benefit. But if they feel they can’t afford toset aside any money, they’ll still be able to opt out.”
Simplification of pension options for small businesses. The bill allows small businessesto establish a combined defined benefit-401(k) plan (or “DB-K,” as it has been called). The planwould be governed by one document with specific accounting for the defined benefit and definedcontribution portions of the trust. Under current law, small employers cannot offer a combined plan,and the complexity of maintaining separate plans discourages many of them from offering robustpension benefits to their employees. “Small businesses create most jobs in this country,” Grassleysaid. “It’s important for those jobs to come with retirement benefits as much as possible. The DB-Kplan will allow small business owners to provide their employees with the best of both worlds at thesame time – a more traditional defined benefit pension and a 401(k) savings plan."
Greater diversification rights for employees with retirement plan funds invested incompany stock. The bill requires companies to allow employees to diversify from company stock.“Employees shouldn’t be forced to invest their retirement money in employer stock," Grassley said.“We need to make sure we never see another Enron, where employees were stuck with companystock in their pension plans that became worthless and unable to diversify that stock.”
Additional IRA contributions for individuals working at bankrupt companies withindicted officials. This would allow for additional individual retirement account (IRA)contributions for workers of companies that have gone bankrupt because of illegal behavior by seniorexecutives. “For example, employees of an Oregon utility company lost their pension holdings whenEnron acquired their company and converted their holdings into Enron stock that became worthless,”Grassley said. “This provision would help to protect employees in such a situation.”Independent investment advice. The Senate bill provides incentives for employers to offerindependent investment advice to their employers. “Workers need more access to high-qualityinvestment advice,” Grassley said. “That means advice provided by an independent advisor free fromconflicts of interest.”
Waiver of early distribution tax for public safety officers. Public safety officers – thepolicemen, firefighters, and first responders who risk their lives to keep citizens safe – often retireearly because of the dangerous and physically demanding nature of their work. The bill would makesure these public servants aren’t penalized for a lifetime of work by providing an exception from thepenalty tax on early distributions from retirement plans. (In the case of public safety officers, thebill would lower the threshold age for the general exception from 59 ½ to 50.) “The police officers,firefighters and first responders who work their entire lives to protect us should be able to rest easyin retirement knowing that their retirement funds are protected from unwarranted taxes,” Grassleysaid.
Faster vesting of employees in defined contribution plans. The bill ensures thatemployees will vest more quickly in the contributions that their employers make to their 401(k)plans. In particular, the bill would shorten vesting periods from 5 years to 3 years. “In today’s mobileeconomy, workers change jobs more frequently then they did even a decade ago,” Grassley said.“Therefore, it’s critical that they vest in their retirement plans more quickly if they are going to buildup the funds necessary for a secure retirement. The faster employees can start saving, the better fortheir secure retirement prospects.”
Encouraging annuitization of retirement accounts. Today, many employers do not offeremployees the option to receive an annuity from their 401(k) plan when they retire. As such,employees often cash out of their 401(k)s without any plan for how to live off the money inretirement. Employers are often afraid to offer annuities because of outdated and unclear rules thatrequire the “safest available” annuity to be offered. The bill would clarify the law in this area byconforming the annuity rules to the normal fiduciary protections in ERISA. “Uncertainty causes plansponsors to avoid options that may be beneficial for employees,” Grassley said. “Annuities are goodfor workers because they guarantee a lifetime stream of income in retirement.”
Apart from the pension bill, Grassley also is advancing the extension of a tax credit for lowincomesavers. The Economic Growth and Tax Relief Reconciliation Act of 2001 provided atemporary nonrefundable credit for contributions made by eligible taxpayers to certain qualifiedretirement plans (e.g., 401(k), 403(b), annuity, SIMPLE, SEP, traditional and Roth IRAs) throughthe end of 2006. The maximum annual contribution for the credit is $2,000. The credit rate dependson the adjusted gross income of the taxpayer. Only taxpayers with AGI of $25,000 or less ($50,000for married couples) are eligible for the credit. The credit is in addition to any deduction or exclusionthat would otherwise apply with respect to the contribution. The new tax relief bill approved by theSenate last month extends that provision through the end of 2009. Nationwide, 5.5 million taxpayers– including 95,889 taxpayers in Iowa – benefit from this provision.
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