Retirement savings plans Featured

7:00pm EDT January 31, 2007

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 act.

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 owner/manager?

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 mmetzler@kmco.com.