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Insurer Pushes Hybrid Retirement Plan

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Rep. Rob Andrews, D-N.J., has introduced two bills that together would permit employers to offer a hybrid retirement plan that would combine features of traditional defined benefit pensions and 401(k) programs.

By removing some onerous red tape governing the administration of defined benefit plans, the proposed accounts would make it easier and more affordable for employers to offer a comprehensive retirement program to workers, advocates say.

Principal Financial Group, Des Moines, Iowa, is backing the bills, predicting their passage would increase retirement savings by Americans through their employers. Principal says it was involved in framing the proposed legislation, which would change tax law and ERISA requirements to permit employers to establish so-called DB(k) plans.

Andrews bills, known collectively as “The Retirement Enhancement Revenue Act of 2004,” would create the DB(k).

Like 401(k) plans, the proposed DB(k)s would allow employees to make pretax contributions to their account, could include employer matching funds and permit employees to invest the 401(k) portion in market instruments such as stock funds.

Employees also would be allowed to take their DB(k) with them when they switch employers, unlike traditional DB plans, which have vesting periods and stop accumulating value when the employee leaves. Portability would make the DB(k) attractive to many younger employees, who tend to change jobs often, notes Stuart Brahs, vice president of federal government relations for Principal.

For older workers, the big attraction would be the defined-benefit feature, which means at least part of their retirement account would be protected from the vicissitudes of the stock market.

“Congressman Andrews legislation will remove much of the red tape that has prevented employers, especially small- and medium-size organizations, from offering pension plans to their workers,” says Larry Zimpleman, president, retirement and investor services for the Principal.

For employers, the DB(k) would provide an important way to attract and retain valued employees, he adds.

With Congress nearing the end of its current session, Andrews is expected to reintroduce his bills in the 109th Congress early next year, Brahs says. Andrews introduced the two bills, H.R. 5397 and 5398, on Nov. 19.

Principal is collaborating with the American Society of Pension Professionals and Actuaries, Alexandria, Va., to find a Senate sponsor of the legislation, according to Brahs, who is the Principals lobbyist in Washington.

The DB(k) concept rose out of discussions that Principal and the ASPPA had with officials of the Pension Benefit Guaranty Corporation over 6 years ago, says Brahs.

The American Academy of Actuaries, Washington, has advanced a similar plan. However, under the AAAs proposed DB(k), defined benefit and 401(k) assets could be merged into one account, while the bill backed by the Principal would not permit this.

Despite these and other differences, “We like what theyve done,” says Ron Gebhardtsbauer, senior pension fellow of the AAA, Washington. “Were happy [the legislation] has been introduced. Our hope is more employers will introduce defined benefit plans as a result. Right now, its not a level playing between defined benefit and 401(k) plans.”

Brahs also predicts interest in defined benefit plans by employers with 100 or fewer employees would grow substantially if the hybrid plans became available.

“Part of the perception about defined benefit plans is that they are expensive and they are a hassle to set up,” he says. “This approach tries to make them easier, more accessible, more economical and more consumer-friendly. The employer would need just one plan document and one actuarial evaluation.”

Brahs says he is “sanguine” that the legislation will get a hearing, although final legislation, if enacted, could be considerably changed from the one proposed by Andrews.

“Its a work in progress, and a number of changes are expected,” he says.

The legislation still needs Senate sponsorship. One of the members of the Senate Health, Education, Labor and Pension Committee or Finance Committee member would be the likeliest sponsors, he says.

Reproduced from National Underwriter Edition, December 3, 2004. Copyright 2004 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.