Generations Will Feel Pension Act Differently
By Kathleen Day, Staff Writer
Sunday, August 20, 2006
The pension legislation President Bush signed last week will
make the most significant changes to U.S. retirement laws in
three decades, affecting workers of every age, from
graduates on their first job to employees who are about to
A key aim of the Pension Protection Act of 2006 is to give
the 44 million active and retired workers who have earned a
traditional pension a greater chance of actually receiving
all of it when they retire. For these workers, the law is
intended to make companies adequately fund traditional
pension plans, stop using bookkeeping that makes plans seem
healthy when they are not, and bar executives from promising
future benefits they can't pay for. And it forces companies
with financially ailing pensions to contribute higher
premiums to the federal insurance program that, when pension
plans fail, pays workers a portion of what they were due.
One concern among experts is that the changes may have the
unintended effect of pushing companies to freeze or drop
pensions rather than bear the additional cost of fully
funding them and paying higher federal insurance premiums.
The law also gives financially troubled airlines, and some
large defense contractors, more time to meet the new
standards, largely out of fear that without such a break,
the firms might walk away from their pensions, dumping them
into the federal insurance plan and raising its costs.
In addition to shoring up the traditional pension system,
the new law seeks to address newer forms of retirement plans
offered in the private sector. During the past 20 years,
many companies have shifted away from traditional pension
plans, which offer defined benefits, and toward savings
plans such as the 401(k), into which employers make set, or
Experts who have studied the 900-page legislation say that
different age groups benefit in different ways. For
example, they say the new law is designed to spur younger
workers to save more so they will have something to retire
on. For these employees, the law provides incentives to
save earlier and more often, and in sounder ways.
Meanwhile, middle-aged and older workers will gain more from
efforts to stabilize traditional defined-benefit plans.
Here's a look at how the law affects different age groups,
and at some issues it fails to address:
- The law makes it easier for financial firms that manage
companies' 401(k) plans to also advise workers on how to
invest their funds. It has a safeguard against conflicts of
interest in that arrangement. It requires any manager who
recommends financial products, and receives commissions on
them, to rely instead on computer-generated recommendations.
- Lets workers leave benefits to a domestic partner or
dependent, not just a spouse. And workers could draw on
retirement funds for medical or financial emergencies
involving domestic partners or other beneficiaries.
- Prevents employers from forcing workers to invest too
heavily in company stock rather than in more diversified
Younger Workers (20 to
- May be the biggest winners under this bill because they
will be in the workforce the longest and have the most time
to save, according to the National Center for Policy
- Will find it easier to participate in 401(k) plans. The
new law encourages employers to offer automatic enrollment,
allows for contributions to automatically increase as pay
increases, and makes it possible to automatically diversify
holdings. Workers can elect to opt out -- a big change from
the current system, in which they must opt in. The
nonprofit Employee Benefit Research Institute estimates that
automatic enrollment will result in a 92 percent
participation rate, compared with today's 66 percent.
Low-income workers, EBRI estimates, will particularly
benefit: Rates of participation by this group are expected
to more than double, to 91 percent.
Middle-Aged Workers (35
- Will be helped by the 401(k) provisions but not as much
as younger workers because they have less time to save and
join a retirement plan, according to EBRI.
- Will also be helped by efforts to shore up traditional
pensions, in which they are more likely than younger workers
to be enrolled.
- Will find it easier to save for college, as several
expiring laws that promoted savings were made permanent.
The contributions to retirement accounts will be permitted
to rise with inflation.
- Will benefit more than any other group from the
provisions on traditional pensions, according to the AARP.
- Should receive more information from companies about the
health of their pension plans.
- Should see companies put more money into underfunded
- Should have new protections against employers that would
promise increased benefits even though a plan is funded.
- The law falls short in several areas, according to
retirement groups, by not requiring companies, when
employees retire, to automatically invest their 401(k) money
in annuities, financial plans that promise to pay a set
amount each month for as long as an employee lives. The
National Center for Policy Analysis says such programs are
vital to prevent retirees from exhausting savings too soon
and then having to live only on Social Security.
- Another concern for some consumer groups is that the bill
makes it easier for hedge funds, which are largely
unregulated investment funds, to manage larger portions of
pension funds without triggering regulatory scrutiny.