Reform Is in the Air

Officials in Washington expect Congress to pass legislation early this year that would shore up the nation’s ailing pension system and provide tax breaks to encourage retirement savings.

The legislation would be a conference bill that meshes provisions of House bill H.R. 2830, the Pension Protection Act of 2005, with the Senate’s S. 1783, the Pension Security and Transparency Act of 2005; both bills passed their respective chambers last fall. House members were to get back to work at the end of January, and that’s when House conferees would likely be named, says Rick Lawson, VP of federal government relations at Principal Financial Group. The conferees, which will likely include the chairman and ranking members of the four committees with jurisdiction in this area, “will do some preliminary talking” then, he says.

H.R. 2830 is a comprehensive bill that updates outmoded pension laws, increases the contributions that employers must make to their pension plans, seeks to shore up the Pension Benefit Guarantee Corp.’s deficit, and would allow investment advisors to give advice to 401(k) plan participants. The bill also would raise the percentage of ERISA plan assets that hedge funds can accept before the funds would be required to comply with ERISA’s fiduciary standards (see Hedge Fund Focus).

By contrast, S. 1783 is “primarily a defined benefit funding bill,” Lawson notes. He says Rep. John Boehner’s (R-Ohio) provision that allows investment advisors to provide advice to plan participants will be included in the conference bill. The Senate bill also includes a new provision called the DB(k), which is a hybrid of a defined benefit and a 401(k) defined contribution plan. Principal Financial Group and the American Society of Pension Professionals & Actuaries (ASPPA) developed the DB(k) concept. The DB(k) “will provide more incentives for small and mid-sized firms that already have a DB plan, or are thinking of setting up a plan, to offer this hybrid product,” Lawson says. “So we’re working to ensure the DB(k) stays in the final bill.”

The funding provisions included in both versions of the House and Senate bills “have the potential to make the DB market stronger and safer going forward, and provide encouragement for employers to get in, and discourage firms that want to leave” the DB market, Lawson says. “When [the bill] comes out of conference in the first quarter and gets signed into law, it will be a big boost for small and mid-sized employers to continue providing DB plans.”

A Tax Reform Foundation

As for Social Security reform, Lawson believes no action will be taken in 2006. This will be the year, however, “to build a platform” for tax reform, Lawson says, with dividends and capital gains taking center stage.

Indeed, in a statement issued on January 12, Treasury Secretary John Snow emphasized the effect of reduced taxes on dividends and capital gains when it comes to business investment, economic growth and job creation. He also voiced his support for making President Bush’s tax cuts under the Jobs and Growth Act of 2003 permanent. “The Jobs and Growth Act of 2003 was especially effective at encouraging investment because it lowered the cost of capital–the lifeblood of a free market economy,” Snow said. “Business investment literally turned around overnight when those tax cuts took effect, ending nine quarters of investment dearth and spurring ten quarters–so far–of outstanding business investment, which has then led to growth and job creation.”

Snow said that “raising taxes on capital carries the risk of reversing this trend in business investment, and this is not an option in my eyes, or in the eyes of the President. On the contrary, making the President’s tax cuts permanent is essential to continuing a strong, positive trend in business investment and in our economy overall.”