From the December 2008 issue of Investment Advisor • Subscribe!

Easing Retirement Plan Woes

Congress weighs solutions

As reports of the huge losses in retirement plans over the past year continue to surface, members of Congress along with the Treasury Department and retirement plan advocates are working to provide workers and retirees some relief now--required minimum distribution rules may be changed before year-end--and into the new year.

Retirement industry experts predict that the 111th Congress will undertake an extensive review of defined contribution and defined benefit plans.

Tom Reeder, an attorney with Treasury's office of tax policy, told attendees at the American Society of Pension Professionals and Actuaries (ASPPA) annual meeting in Washington in mid October that Treasury and Congress "are looking at ways to change" the rules that say retirees in IRAs must continue to take their required minimum distributions. As retirement plans' values have plummeted during the market crisis, these "retirees may not want to take out as much as the current regs require," Reeder said.

Indeed, Lynn Dudley, senior VP, retirement policy at the American Benefits Council (ABC) in Washington, says that allowing those retirees aged 70 1/2 to not take the required minimum distributions from their IRAs will likely hinge on whether a stimulus bill gets passed. "If a stimulus bill happens, I think there is a lot of interest in addressing the minimum required distribution issue," she says.

Some members of Congress are also willing to consider waiving this year the 10% penalty tax that's levied against those who take early withdrawals from their IRAs, Dudley says. "I think there's empathy that maybe this isn't the year to penalize people for taking withdrawals," she says. "It's hard to impose that when people are suffering, and most hardship" withdrawals are taken by lower-income workers.

Easing the required minimum distribution rules and waiving the 10% penalty were part of the American Benefits Councils's 10-point plan it presented to Congress in October, which outlined ways to help individuals get through the tough economic times, prevent "unexpected and unintended pension funding mandates that would cost jobs and trigger massive benefit 'freezes,'" and for encouraging future retirement saving.

Most Critical? Funding DB Plans

The most critical issue to solve now, Dudley says, is the funding of defined benefit plans as set forth in the Pension Protection Act (PPA) of 2006, "because it translates into job losses right now." Here's why: The PPA was enacted in 2006, but this is the first year that it takes effect, and as it takes effect, Dudley explains, there's a transition rule. When the transition rule was put in place in 2006, nobody could have foreseen what would occur in the markets in 2008, she says. "In our opinion, we made the transition too tight and we did not accommodate such a 40% drop in the market," she says. "So now we have rules taking effect that have a very tight transition that are causing some companies to experience hundreds of millions of dollars of obligations when they had no obligation at the beginning of the year."

Some companies, she says, are facing "over a 6,000% increase in contribution obligations." The huge drop in the markets occurred simultaneous to the credit crunch, Dudley says. "Most companies have lines of credit now but for a while they didn't and they dipped into their cash reserves to pay payroll or whatever. Now, they've depleted some of their cash reserves and their contributions to their pension plan [are facing percent increases of] thousands." To fix this conundrum, ABC, as part of its 10-point plan, told Congress to permit pension plans to smooth out unexpected asset losses, as clearly intended by Congress in 2006; permit full asset smoothing to recognize the long-term nature of pension obligations; and provide a transition to the funding rules.

ABC also asked Congress to increase the start-up credit for small business retirement plans. "A downturn like this tends to keep small businesses from maintaining plans," Dudley says. "So people have been receptive to looking at a stimulus to help them get going again."

Broadening the group eligible for the Saver's Credit may also be on the table. Democrats want to make the Saver's Credit tax refundable and Republicans don't, Dudley says. "I think people would agree the cutoff for people who would fall into the saver's credit is really low, $32,000."

Dallas Salisbury, president and CEO of the Employee Benefit Research Institute (EBRI) in Washington, agrees there will be a "possible attempt to make the saver's credit refundable." Salisbury also predicts the 111th Congress will hold a series of hearings "on the state of the retirement system, the state of DB and DC plans in particular, and how to expand those with retirement savings (default IRA proposal)." Also, he says, look for a "tough review of the budget and all tax incentives--including those for retirement savings--and possible changes in the limits of what can be contributed.... The deficit situation makes new incentives unlikely unless they are paid for with reductions in other incentives."

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