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.
The new COLI provision in S. 219 “would enhance protections for employees by setting standards for informed consent,” says Roger Sutton, president of the Association for Advanced Life Underwriting, Falls Church, Va. “It also would ensure the continued viability of COLI as an important business planning tool that is used responsibly for the benefit of employers, employees and their families, and the general public.”
Frank Keating, president of the American Council of Life Insurers, Washington, notes that the Senate Finance Committee approved a similar COLI provision in February 2004. The new version appears to have a better chance of passage, Keating said.
A COLI bill similar to the COLI provision in the NESTEG bill has the support of 31 members of the House Ways and Means Committee, Keating said.
- Interest rate benchmarks: Grassley’s bill would phase in use of a yield curve approach between now and 2010.
If a yield curve approach were required, defined benefit pension plan sponsors and administrators would have to use different interest rates to reflect pension obligations to employees with different expected retirement dates.
The Bush administration has supported the yield curve approach, arguing that it will give plans, regulators and employees a better idea of how plan assets really stack up against plan liabilities.
The American Benefits Council, Washington, an employer group, and other employer organizations have argued that the yield curve is too complicated and may not provide much better information than using a simple interest rate benchmark.
The revised version of S. 219 approved by the Senate Finance Committee “still tracks quite closely to the administration’s proposal, with which we have expressed a number of concerns,” says American Benefits Council President James Klein.
Members of the House and members of the Senate Health, Education, Labor and Pensions Committee could come up with defined benefit pension bills of their own, and Congress could end up including a defined benefit measure in a broader measure, Klein says.