We've all heard of a defined benefit plan and defined contribution plans like the 401(k). But what's a DB(k)? Rep. Rob Andrews (D-NJ) introduced his pension reform bill on November 19, "The Retirement Enhancement Revenue Act of 2004," which included a provision calling for the creation of a hybrid combination of a traditional DB plan and a 401(k).
The Principal Financial Group and the American Society of Pension Professionals & Actuaries (ASPPA) are the brains behind the DB(k). Rep. Andrews--the ranking Democrat on the House Education and Workforce's Employer-Employee Relations Subcommittee--has been helping both groups develop the DB(k) concept. Larry Zimpleman, president of Retirement and Investor Services at The Principal, says the DB(k) "is essentially a defined benefit plan with 401(k) features but without the complexities of a traditional pension plan."
The savings rate among Americans is at an all-time low, and the "vast majority of workers are employed by small businesses," which lack the array of retirement savings programs available to larger firms, says Stuart Brahs, VP of federal government relations at The Principal. A recent study by the company found that less than 40% of small firms, those with 10 to 1,500 workers, offer DB plans, Brahs says. The DB(k) is designed to "encourage small- and medium-sized firms to provide both the stability of a DB plan and the flexibility of a DC plan," he adds.
Small- and medium-sized firms avoid setting up DB plans because they're costly to maintain and administer, in part, Brahs says, because of the annual premium that has to be paid to the Pension Benefit Guaranty Corp. (PBGC). DB plans are also complicated to structure. But the DB(k) is designed to "provide a slimmed-down arrangement whereby the cost and the administrative burden are kept at a minimum," Brahs explains. The DB(k) would save money because small firms would only need one plan document and one Form 5500--the annual reporting document that's filed with the government, Brahs says. By combining both plans in a DB(k), only one actuarial exam would need to be performed each year instead of two.
Introducing a bill during a lame-duck session of Congress may seem like a futile endeavor, but Brahs says The Principal and ASPPA encouraged Rep. Andrews to introduce the bill in 2004 so he could garner feedback on the DB(k) concept before the 109th Congress convenes this year. That way, Andrews can review the comments and implement changes to the bill before reintroducing it this year--as early as February, Brahs says.
The Principal and ASPPA are also searching for a Senate sponsor. "We've talked to a number of people on both sides of the aisle," Brahs says. The ideal sponsor would be a member of the Finance Committee, which has jurisdiction over taxes, or the Senate Health, Education, Pension and Labor committee, which has jurisdiction over ERISA, he says. Principal plans to resume talks with both committees once the new members are installed this year.
Before Principal or any other firm could offer the DB(k), Congress must first agree to amend the tax code and ERISA. That won't be easy. "There is one plan with the DB(k), but there are two pots of money," Brahs says. The money in the DB and DC plans are not commingled, he says, "so the DB portion would continue to be overseen by the PBGC, and the 401(k) would be overseen by Treasury and IRS." In order to have one plan document and one summary plan description, he says, "you'd have to change the laws because they are fairly rigid in the way they're written."
The DB(k) won't be the only retirement savings issue for Congress to consider this year. In Brahs's opinion, "the 109th Congress is going to be the pension Congress." Why? "Congress has to replace the defined benefit funding mechanism--the 30-year T-bond rate it messed around with--by December 31." The PBGC needs reforming as well. Then there's Senator Charles Grassley (R-Iowa), chairman of the Senate Finance Committee, who plans to reintroduce his pension reform bill, the National Employee Savings and Trust Equity Guarantee Act (NESTEG). Finally, let's not forget reform of the Social Security system, which, Brahs predicts, "will be debated, but there will be no action."--Melanie Waddell