Retirement savings plans

Tired, traditional defined-benefit
plans will get even more of an overhaul with reform legislation that reflects a push toward more creative
401(k) plans and other flexible retirement savings vehicles.

The Pension Protection Act of 2006
may put more pressure on managers and
business owners. Higher contributions
to defined-benefit plans will impact companies’ cash flow and net income.

“The positive is that opportunities exist
for employers to provide for their
employees’ retirement,” says Mark G.
Metzler, CPA and director in the
Accounting and Auditing Department of
Kreischer Miller.

Smart Business asked Metzler to
review what you should know about the

What is the Pension Protection Act of 2006?

The Pension Protection Act of 2006
was signed into law by President Bush
on Aug. 17, 2006. It is the most comprehensive pension reform legislation since
ERISA was enacted in 1974. The act will
impact how retirement plans are
designed and administered, requiring
companies to amend plan documents. It
also will increase plan funding and
require additional plan disclosures to
plan participants and in regulatory filings.

The act reflects the trend away from
traditional defined-benefit plans toward
401(k) plans and hybrid designs.

Why was the act necessary?

A number of factors contributed to the
need for Congress to take measures to
stabilize our retirement plan system. The
well-known collapses of WorldCom and
Enron resulted in the loss of retirement
savings for thousands of employees in
their defined-contribution plans. Additionally, the combination of declining
stock market values and a low interest
rate used for discounting pension obligations created a crisis among sponsors of
defined-benefit plans.

Aren’t pension benefits guaranteed?

Yes and no, depending upon the type of
plan. With a defined-benefit plan, the
Pension Benefit Guaranty Corporation
(PBGC) may assume responsibility for
payment of certain benefits for terminated plans. However, the large plan terminations in 2002, 2003 and 2004 contributed to the PBGC reporting an
excess of $11 billion in claims at the end
of 2004. With additional plan terminations after 2004, the PBGC’s ability to
pay all of the claims is threatened.

With a defined-contribution plan, there
is no such guarantee for the plan participant. The benefit to which an employee
is entitled is the amount that can be paid
from the employee’s account (based
upon both employee and employer contributions and investment earnings).

How does the act help?

The key provisions of the act can be broken down into four areas: reporting and
disclosures; participant notices; pension
funding; and revenue and other provisions.

With respect to reporting and disclosures, the act requires the plan’s Form
5500 annual reports to be made available electronically on the Department of
Labor’s Web site and on the plan sponsor’s
intranet Web site. Additionally, multi-employer defined-benefit plans require
actuarial certification as to whether the
plan is in endangered or critical status.

Participant notification has also been
improved. The act requires quarterly benefits statements for participant-directed
defined-contribution plans, annual statements for other defined-contribution plans,
and statements every three years for
defined-benefit pension plans. Also, pension funding has been enhanced by establishing new minimum funding standards
for defined-benefit plans and accelerating
contribution requirements for at-risk plans.

Other provisions of the act allow companies with up to 500 employees to
establish combined defined-benefit and
automatic-enrollment 401(k) plans using
a single document and trust fund beginning in 2007. Additionally, fiduciary
advisers of a plan are permitted to provide investment advice to 401(k) participants or beneficiaries, if certain conditions are met. Also, various tax retirement savings incentives of the 2001 tax
law (such as age 50 catch-up contributions) that were set to sunset
(expire) in 2010 have been made permanent, unless Congress decides to repeal
them at a later date.

How does the act affect the business

CEOs, CFOs and HR directors will
want to understand the act. Changes
outlined in the act could have dramatic
effects on the cash flow, earnings and
benefit payments of businesses with
benefit plans. Employers and plan sponsors will want to review their existing
plans for compliance and may want to
consider other plan designs. There
appear many opportunities for employers to ensure greater retirement security
for their employees.

MARK G. METZLER, CPA is a director at Kreischer Miller in
Horsham, Pa. He is also the firm’s liaison with the AICPA’s Employee Benefit Plan Audit Quality Center. Reach him at (215) 441-4600 or e-mail him at [email protected].