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Last-Minute Turmoil Over Pension Bill

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Legislation reforming the defined benefit pension system that will, among other things, allow the insurance industry to offer an array of new products in the defined contribution business hung in the balance at press time Thursday–with some Republicans insisting that Congress tie expiring tax breaks that are extended in the pension bill with estate tax reform. (See related story titled, “Estate Tax Skirmishing.”)

Before the impasse developed, members of a conference committee seeking to reconcile differing House and Senate bills had painstakingly crafted legislation over many months that would allow insurance agents who are employed by an employer’s 401(k) plan provider to give investment advice to plan members.

If the impasse is broken, the plan is for the House to take up the bill before departing for a month-long recess July 27. The plan was for the Senate to take up the bill before leaving Aug. 4.

Michael Kerley, senior vice president, federal government relations, at the National Association of Insurance and Financial Advisors, said before the impasse developed that “in general, this is a good package.”

He cautioned his comments were based on the fact that, in the end, the legislation would not contain “an estate tax component that is a budget buster and is not sustainable, given the realities of the huge budget deficit.”

“This can be a torturous process, but it is how laws are made in this country,” said Jack Dolan, a spokesman for the American Council of Life Insurers. “We are waiting for word and hoping that it is that the conference has concluded and pension reform will pass,” Dolan said.

The industry also won the right through the legislation to offer hybrid annuities containing long term care riders.

Another provision strongly supported by the industry and apparently contained in the tentative compromise bill codifies the tax treatment of corporate-owned life insurance. The provision would also codify best practices now used as the industry model for sale of these instruments.

The tentative compromise bill would also make permanent the pension and retirement benefit enhancements contained in the Economic Growth and Tax Relief Reconciliation Act of 2001 and allow for automatic enrollment of new employees in 401(k) plans. This provision contrasts with current practice, which requires employees to sign on to 401(k) plans.

“The extension of the EGGTRA provisions is very positive for future retirees,” Kerley said.

In another victory for the industry, the final bill also omits a provision contained in the Senate version of the legislation that would severely limit the sale of investor-owned life insurance (IOLI) or, as it is sometimes called, stranger-owned life insurance. That issue will be on the agenda for tax writers next year, lobbyists and staffers said.

But the industry apparently did not win support for a provision allowing workers to roll over from year to year unused amounts contained in Flexible Spending Arrangements.

Kerley said that while rollover of FSA accounts is “very popular,” both with members of Congress and workers, it lost out “because the revenue losses from the provision were determined to be too high.”

The COLI provision would effectively end years of controversy over alleged abuse by industry and insurers of this product.

Among other features, the legislation contains language that would effectively limit coverage of COLI to directors and “highly compensated employees,” who are defined as individuals earning at least $100,000 annually or in the top 35% by compensation, and require employers to obtain the informed consent of any employee before enrolling him or her in a COLI plan.

It also would require employers to report information about their COLI plans to the Internal Revenue Service.

The investment advice provision generated some of the most intense negotiations. Several insurance industry officials said it is their understanding that the final compromise would require the agents to provide the plan participant they are advising with an independent, computer-generated model.

The computer model either has to be an independent third-party model or a proprietary computer model validated by a third-party expert, several lobbyists said.

Kerley lamented the final agreement on investment advice, which generated weeks of counter offers from Sen. Charles Grassley, R-Iowa, chairman of the Senate Finance Committee, on behalf of opponents of language in the House version of the bill providing only weak safeguards against potential conflicts of interest.

The major advocate for the House language was Rep. John Boehner, R-Ohio, the House majority leader who supported the House language in his former role as chairman of the House Committee on Education and the Workforce.

“This provision is only marginally useful to the average person,” Kerley said. “It still will not allow an agent from a company marketing mutual funds options for a 401(k) plan to provide actual advice firsthand to an employee trying to decide which 401(k) options to take.

“Instead,” he said, “it would substitute a computer program created by the company providing the 401(k) plan.” He explained that his view of the language is that the computer program has to be certified by an independent investment advisor that it is an objective index of investment objectives.

“We’re very grateful to Rep. Boehner for making this issue a focal point of these pension negotiations, but we are disappointed that the conference committee did not adopt Rep. Boehner’s House proposal,” Kerley said.


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