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Retirement Planning: Congress to Tackle Pension Funding, Investment Advice

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Congressional action on two key areas of retirement planning–defined benefit (DB) funding and investment advice–are expected to come by year-end, which is good news to those who say action is sorely needed.

Companies that sponsor traditional pension plans are still trying to overcome the huge jump in funding obligations resulting from the combined effects of the market losses in 2008, the tightened credit markets, and low interest rates, says Lynn Dudley, senior VP for policy at the American Benefits Council in Washington.

The House Ways and Means Committee held a hearing October 1 to figure out how to ease companies’ DB funding obligations. Those in the industry as well as Congress agree that “we have an emergency problem,” Dudley says. Congress has “to do something this year, otherwise we have to start laying people off.”

The market collapse in 2008 was not something that had been modeled during drafting of the Pension Protection Act of 2006 (PPA), which set out how funding obligations should be calculated. “When you have dramatic losses, you go to the credit markets and you buy the difference. Companies can’t go out and borrow the money for their pension plan because there isn’t that much liquidity in the credit market because of the financial crisis,” Dudley explains. “On top of that, interest rates are really low and that’s increasing our liabilities–the lower the interest rate, the higher the liabilities because you are using that to predict how much you’re going to earn in the future. So the combination is holding funding obligations at an exorbitant amount, in some cases a 650% increase.”

The final guidance on DB funding released by the Treasury Department in early October “doesn’t remedy the problem,” Dudley says. Rather, it clarifies that for 2009 funding obligations, companies can use a “spike in the spot rate [the interest rate used in the fall of 2008] and then switch back to a smoothed rate for calculating liabilities,” she says. “We’ve solved the problem for 2009,” Dudley continues, but the funding problem for 2010 is right around the corner. “It’s already fourth quarter of 2009, and our obligations for 2010 are locked in on January 1, 2010.”

The Advice Issue

As for investment advice, industry officials argue that H.R. 2989, the 401(k) Fair Disclosure and Pension Security Act of 2009, passed by the House Committee on Education and Labor in June, will substantially reduce the number of participants who actually receive advice under the current rules. James McCarthy, managing director of retirement plan services at Morgan Stanley Smith Barney, testified before the Ways and Means Committee October 1 on behalf of the Securities Industry and Financial Markets Association (SIFMA), and said that because H.R. 2989 prohibits financial institutions from recommending an investment “if they or their affiliate serves as a custodian, broker, record keeper, or investment provider to a plan or IRA,…roughly 20 million fewer plan participants and IRA owners will no longer have access to existing advice programs, let alone the expanded offerings that PPA [Pension Protection Act of 2006] was to make available.” Travis Larson, a spokesperson for SIFMA, says that the organization expects the House Ways and Means Committee “to mark up legislation this fall,” and that he expects the bill will focus on DB funding and fees, and “possibly an advice piece.”