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Pension Reform Bill Near?

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Lawmakers failed to unveil the much-anticipated compromise bill on pension reform before leaving for spring break in mid-April, which means the unveiling of a final bill could likely “drag out” for some time, says Dan Houston, senior VP at the Principal Financial Group. But that’s because lawmakers “want to get a good bill out, rather than a quick bill,” he says, noting that after lobbying top lawmakers on the Hill, he’s confident lawmakers won’t get bogged down in partisan politics. “Both sides [of the aisle] want to be thoughtful about getting a good piece of legislation out.”

The final legislation would be a compromise bill meshing 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. Getting one’s arms around the huge number of provisions included in both bills is a daunting task, but the overhaul can be summed up as a “modernizing of defined benefit plans and a strengthening of defined contribution plans,” says Scott Talbott, senior VP for Government Affairs at The Financial Services Roundtable in Washington, D.C.

Rick Lawson, VP of federal government relations at the Principal Financial Group, adds that he hopes the compromise bill “strengthens DB plans as well.” Compromise legislation would likely include creating “a fixed method to determine the interest rate to be used to fund DB plans,” he says, which “will stabilize and encourage more DB plan formation.” Any compromise legislation would also seek to “legitimize” cash-balance plans, which are not covered under the Employee Retirement Income Security Act (ERISA), Lawson says. “Since the whole plan design of a cash-balance plan has not been legitimized, small and mid-sized employers are reluctant” to put one in place, he says.

A judge ruled in what is known as the IBM v. Cooper case in Vermont that cash-balance plans are age discriminatory. Older plan participants sued IBM when it converted to a cash-balance plan from a traditional DB plan because while the benefit formula under a cash-balance plan “increases for younger workers, it decreases for older workers,” Talbott says.

Houston says it’s also vital for a final bill to make permanent the catch-up provisions and higher dollar amounts that can be contributed to retirement plans as set out under the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRA).

Both Houston and Lawson are optimistic that the DB(k), which is a hybrid of a DB and 401(k) defined contribution plan, will make it into the final legislation. The DB(k) concept has bipartisan support, Lawson says.

Finding a compromise on the issue of allowing advisors to give investment advice to plan participants is also on the table. Under the Senate bill, “a number of the investment advice provisions are actually just being put into statute that are contained in an IRS letter ruling–known as the SunAmerica letter ruling–which allows plan sponsors to use third-party advisors,” Lawson says. However, “those third-party advisors can’t tell you to buy ABC stock. They can only give you investment guidelines.” Under the House bill, however, advisors “are allowed to go further in making recommendations,” he says. What the conferees will have to work out is a compromise that ensures “that the participants are protected.”