Advisors are hailing the recently passed pension reform legislation as a treasure trove of goodies that’s long overdue. The whopping 900-page legislation, called the Pension Protection Act of 2006, passed both the House and Senate and brings more certainty to defined benefit plan funding rules, while also enabling individuals to continue contributing at higher rates in their 401(k) and IRA retirement savings plans. President Bush signed the legislation into law on August 17.
The Act sets out new funding and disclosure requirements for defined benefit pension plans. It also adopts a number of provisions that encourage more participation in defined contribution plans. For instance, it makes permanent the higher contribution limits to 401(k)s and IRAs under the Economic Growth and Tax Relief Reconciliation Act (EGTRRA) of 2001, allows employers to set up automatic enrollment in 401(k) plans, and allows more types of providers to offer investment advice to employees–a provision that was crafted by House Majority Leader John Boehner (R-Ohio).
Industry observers say mutual fund firms are now in a position to gain financially since more workers are expected to pour more money into 401(k)s. Since registered reps of broker/dealers will now be allowed to provide advice to plan participants, Don Trone, president of Fiduciary 360, says the Act will “put considerable pressure on broker/dealers to define appropriate investment fiduciary policies and procedures for their brokers serving as fiduciary advisors.”
In addition, the Act also makes permanent the tax incentives for Section 529 college savings programs, and allows for the creation of the DB(k), a hybrid combination of a traditional defined benefit plan and a 401(k) defined contribution plan.
The Principal Financial Group and the American Society of Pension Professionals & Actuaries (ASPPA) developed the DB(k) concept, which allows employers to provide guaranteed defined benefits and 401(k) employee savings in a single plan, eliminating the complexity of administering two separate plans.
Good News for Non-Spouse Beneficiaries, and Charities
Bill Knox, a CFP with Regent Atlantic Capital in Chatham, New Jersey, says he’s particularly excited about a few of the Act’s provisions. First, the Act will allow non-spouse beneficiaries of a deceased retirement plan participant to transfer their shares of the decedent’s plan benefit into an IRA, he explains.
“As someone who was a practicing ERISA lawyer for 25 years, I am most enthusiastic about the rule for non-spouse beneficiaries,” he says. “It has griped me since 1974 that the surviving spouse of a deceased retirement plan participant was allowed to do a tax-free rollover from the plan into an IRA, but a surviving child could not do so and was frequently compelled to receive his or her entire share of the plan benefit as taxable income within a year or two after the parent’s death.”
Knox also likes the provision that allows IRA owners who have reached age 70 1/2 to make a direct charitable contribution from their IRAs of up to $100,000. Bob Wacker, a CFP with R.E. Wacker Associates in San Luis Obispo, California, agrees that clients will welcome this provision with open arms. He explains that the provision provides an exclusion from gross income for certain distributions given to charities of up to $100,000 from a traditional IRA or a Roth IRA, which would otherwise be included in income.
To qualify, however, “the charitable distribution must be made to a tax-exempt organization to which deductible contributions can be made, but it excludes donor-advised funds and private foundations,” he says, and the provision is effective for two years through 2007. “For folks who either want to make a large donation that might otherwise be partially excluded because it exceeded 50% of their AGI, or for folks who don’t itemize, this is a good opportunity to give to charity on a pre-tax basis.”
Washington Bureau Chief Melanie Waddell can be reached at firstname.lastname@example.org.