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.
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