The employers that still promise employees a defined level of retirement income need regulatory flexibility to get through the financial crisis, benefits consultants are warning Congress.

The benefits consultants, employer group representatives and others testified today at a House Ways and Means Committee hearing.

Employers have shut down many traditional defined benefit pension plans in recent years, in part because of the expense, in part because of the regulatory complexity, and in part because of a sense that many employees preferred to manage their own 401(k) plan accounts.

Today, 401(k) plan participants are feeling the effects of the financial crisis.

But, if any employers are going to show new interest in defined benefit plans as a result, the government has to do something about the rules governing pension funding requirements, according to Mark Warshawsky, retirement research director at Watson Wyatt Worldwide, Arlington, Va.

Congress tightened pension funding and reporting requirements in 2006, when it passed the Pension Protection Act.

PPA includes many useful ideas that would have worked well in normal times, Warshawsky said.

“Yet, at the exact time that the somewhat stricter funding regime of PPA was coming on line, we experienced an almost unprecedented financial meltdown and deep recession,” Warshawsky said. “Huge funding contributions would have been required when corporate cash flows were low and capital markets closed.”

Congress reacted in 2008 by passing the Worker, Retiree and Employer Recovery Act of 2008, which let employers postpone or reduce some pension plan payments, and the Internal Revenue Service has used guidance to further lighten the load this year, Warshawsky said.

The average 2008 regulatory funded status was 96% and employers had to make about $40 billion in funding payments.

Without any changes, the average funded status would have dropped to 75% this year, requiring employers to make $110 billion in funding payments for the 2009 plan year, Warshawsky said.

Instead, new laws and regulations increased the average 2009 regulatory funded status to 94%, and reduced required funding payments about $32 billion, Warshawsky said.

But, if Congress fails to act, the required payments will increase to $94 billion in 2010 and to $146 billion in 2011, he said.

Craig Rosenthal, a principal at Mercer, a unit of Marsh McLennan & Companies Inc., New York, talked about a survey of 874 Mercer pension plan clients.

The funding relief provided by Congress and the IRS has been a big help to those clients, Rosenthal said.

But 21% of surveyed calendar-year plans still face 2009 required contributions that are substantially higher than the corresponding 2008 contributions, Rosenthal said.

Current relief will have little effect in 2010, Rosenthal added.

“Looking ahead to 2010 — barring an enormous market recovery or another spike in interest rates comparable to those in October 2008 – we expect that many defined benefit plans will face significantly increased required contributions,” Rosenthal said.

Investment returns have started to recover, but “they are far from being sufficient enough to reverse the dramatic investment losses suffered by most plans during 2008,” Rosenthal said. “In addition, current interest rates are substantially lower than they were in October 2008, which means that regardless of the interest rate elections made for 2010, it is anticipated that most plans will be faced with substantially lower interest rates. “

William Nuti, chairman of NCR Corp., Duluth, Ga., who represented the American Benefits Council, Washington – a coalition of large employers – at the hearing, said the pension funding rules issue is really an economic recovery issue.

“We are not here today to ask for a bailout,” Nuti said. “Nor are we asking to be relieved of our pension funding obligations. Rather we and other plan sponsors need more time to amortize the extraordinary market losses of 2008. Given such time, we can manage the losses our plan sustained in the market downturn, and at the same time make the necessary investments to grow our business and create jobs.”

Nuti praised a pension bill draft, developed by Rep. Earl Pomeroy, D-N.D., a member of the Ways and Committee, that would let companies that prepaid their funding obligations use those prepayments, or “credit balances,” to satisfy their funding obligations.

Nuti also praised a provision of the Pomeroy bill that would prevent many companies from providing additional benefits to bridge their early retirees until the retirees are old enough to qualify for Social Security benefits, Nuti said.

The committee also heard testimony on the rules governing advisors who work with 401(k) plan participants.

The National Association of Insurance Advisors, Falls Church, Va., says the PPA provisions that permit advisor represents to assist plan participants have helped close an “advice gap” that existed before PPA took effect.

NAIFA is opposingprovisions in a new bill, H.R. 2989, which would prohibit investment advisers who represent companies providing investments to 401(k) plans from providing advice to plan participants.

Those provisions would bring back the old advice gap, NAIFA President Tom Currey says.

“Planning for retirement is a complex task, and investors need to be fully informed as they make critical decisions about their financial futures,” Currey says in a statement about the bill.

Links to copies of the written versions of the witnesses’ testimony and other hearing documents are available here.