The Senate Finance Committee voted unanimously Tuesday to approve a revised version of a bill that would make many changes in the federal laws governing defined benefit pension plans and other retirement plans.[@@]
Provisions of the bill, S. 219, the National Employee Savings and Trust Equity Guarantee Act, would protect spouses’ interests in retirement benefits; encourage employers to offer financial counseling to retirement plan members; require sponsors of defined benefit pension plans to offer participants clearer, more comprehensive financial reports; clarify the status of cash-balance pension plans; codify the use of corporate owned life insurance; and replace the old 30-year Treasury bond interest rate benchmark with a “yield curve” approach in calculations of defined benefit pension plan obligations.
- Cash balance plans: The cash-balance provision creates new rules for employers that want to convert traditional defined benefit pension plans into cash-balance “hybrid” plans.
Traditional plans use contribution formulas that assume employees will spend decades working for a single employers. Contributions are smaller for newer employees and bigger for employees with more years of service.
Cash-balance plans use a formula that assumes employees will hop from job to job. Employers do not take seniority into account when making contributions. The cash-balance helps young employees take away more cash when they leave, but critics say it leads to lower pension values and benefits for older employees.
The new version of S. 219, which was introduced and revised by Sen. Charles Grassley, R-Iowa, chairman of the Senate Finance Committee, “makes it clear that the hybrid plan design is legitimate,” said Sen. Max Baucus, D-Mont., the senior Democrat on the committee. “Equally important, we provide protections for older, loyal employees when a company desires that it must make the move from a traditional to a hybrid plan.”
Although the transition to a cash-balance plan can be “painful,” hybrid plans are better suited for today’s more mobile workforce, Baucus said.
- COLI: The COLI provision in the new version of S. 219 would limit COLI to covering only highly compensated employees and would require the consent of the employee being covered. Under the law, a highly compensated employee would be one making at least $90,000 annually or ranking in the top 35% in terms of compensation.
Employers use COLI polices to protect against the loss of valued employees and to help fund benefit programs, including pensions plans.