New law, new opportunities: the Pension Protection Act changes the landscape of defined-benefit and defined-contribution plans. For insurers and producers, it offers a big chance in a big market to build business.Key Points * With Social Security and pension plans under pressure, the new law should boost financial-services companies that provide retirement products. * The law seeks to stabilize ailing defined-benefit pension plans defined-benefit pension plan A pension plan in which retirement benefits rather than contributions into the plan are specified. Thus, a retired employee who has reached a certain age with a given number of years of service and has earned a certain income is and strengthen the viability of the defined-contribution plan Defined-Contribution Plan A retirement plan wherein a certain amount or percentage of money is set aside each year for the benefit of the employee. There are restrictions as to when and how you can withdraw these funds without penalties. market. * Sanctioning sanc·tion n. 1. Authoritative permission or approval that makes a course of action valid. See Synonyms at permission. 2. Support or encouragement, as from public opinion or established custom. 3. of cash-balance plans and the creation of the DB(k), a hybrid mix of defined-benefit and defined-contribution, should also help generate traditional defined-benefit alternatives. * The law is likely to encourage competition and product development. Insurers are upbeat about the Pension Protection Act of 2006, signed into law Aug. 17 by President Bush. The 900-page law focuses on the safety of existing defined-benefit plans Defined-Benefit Plan An employer-sponsored retirement plan for which retirement benefits are based on a formula indicating the exact benefit that one can expect upon retiring. Investment risk and portfolio management are entirely under the control of the company. and their funding rules, but it also contains many provisions that should boost the defined-contribution plan business and help individuals save for retirement. "It was such a positive outcome," said Rick Lawson, vice president of federal government relations and lobbyist for the Principal Financial Group. Insurers said the most significant feature of the act on the defined-contribution side is that it made permanent the retirement-plan provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA EGTRRA Economic Growth and Tax Relief Reconciliation Act of 2001 (also known as EGTRAA 2001) ). This act dramatically raised annual contribution limits for qualified plans, including 401(k)s, 403(b)s and 457s, and for Individual Retirement Accounts. The higher limits have resulted in a greater inflow in·flow n. 1. The act or process of flowing in or into: an inflow of water; an inflow of information. 2. of assets into plans provided not only by insurers, but other financial-services companies. These higher limits were scheduled to sunset after 2010 and fall back to pre-EGTRRA levels in 2011. But there are also new provisions that could boost insurers' defined-contribution business lines. They include: * Automatic enrollment by employers of employees into qualified plans. Employees have the right to refuse enrollment. * Creation of a safe harbor Safe Harbor 1. A legal provision to reduce or eliminate liability as long as good faith is demonstrated. 2. A form of shark repellent implemented by a target company acquiring a business that is so poorly regulated that the target itself is less attractive. for automatic contribution arrangements in 401(k) plans of from 3% to 10% of salary with company matches on certain amounts of money contributed. * Automatic escalation es·ca·late v. es·ca·lat·ed, es·ca·lat·ing, es·ca·lates v.tr. To increase, enlarge, or intensify: escalated the hostilities in the Persian Gulf. v.intr. of contributions in ensuing en·sue intr.v. en·sued, en·su·ing, en·sues 1. To follow as a consequence or result. See Synonyms at follow. 2. To take place subsequently. years, with an employee right of refusal. * Creation of default investment options for plan participants Plan participants Employees or other beneficiaries who are eligible to receive benefits from a company's employee benefit plan. unable or unwilling to choose. * A new right for 401(k) plan participants to divest To deprive or take away. Divest is usually used in reference to the relinquishment of authority, power, property, or title. If, for example, an individual is disinherited, he or she is divested of the right to inherit money. stock of their employer and improve diversification. * The indexing to inflation of IRA Ira, in the Bible Ira (ī`rə), in the Bible. 1 Chief officer of David. 2, 3 Two of David's guard. IRA, abbreviation IRA. contribution limits beginning in 2007. Scott Sleyster, executive vice president of Prudential Retirement's full-service retirement business, said the new provisions allow plan sponsors and providers to do many of the things for employees that they did "in the old days" of defined-benefit plans. "You would have automatically put people into the plan, saved more for them--and the appropriate amount--over time as they aged, and you'd have invested the money for them in a well-designed, risk-based portfolio that you vetted with a sophisticated professional investment adviser," he said. "Well, guess what: Now we have the ability to do almost all of that for them and still give them the portability and visibility of a DC plan. I just think that's a very good outcome." The act creates other changes, as well. Among them: * Non-spouse beneficiaries gain the right to roll over assets from inherited inherited received by inheritance. inherited achondroplastic dwarfism see achondroplastic dwarfism. inherited combined immunodeficiency see combined immune deficiency syndrome (disease). qualified plans into IRAs. Previously, they were limited to a plan's distribution options, which frequently required lump-sum or all distributions within five years. The act gives them the right to stretch distributions from a roll-over IRA over their lifetimes. * Insurers receive the green light to add long-term-care insurance riders to annuities and life insurance, with payments for the riders from cash values excludable from gross income. * Plan sponsors and providers will gain the right in 2010 to create so-called DB(k) plans combining elements of defined-contribution and defined-benefit plans into a single trust with one filing. The act arrives at a time when the future of Social Security is shaky, many defined-benefit pensions are underfunded un·der·fund tr.v. un·der·fund·ed, un·der·fund·ing, un·der·funds To provide insufficient funding for. underfunded adj → infradotado (económicamente) , and defined-contribution plans are becoming more important to retirement security. Meanwhile, the personal savings rate Savings rate Personal savings as a percentage of disposable personal income. in the United States United States, officially United States of America, republic (2005 est. pop. 295,734,000), 3,539,227 sq mi (9,166,598 sq km), North America. The United States is the world's third largest country in population and the fourth largest country in area. is negative. According to according to prep. 1. As stated or indicated by; on the authority of: according to historians. 2. In keeping with: according to instructions. 3. the Bureau of Labor Statistics Bureau of Labor Statistics (BLS) A research agency of the U.S. Department of Labor; it compiles statistics on hours of work, average hourly earnings, employment and unemployment, consumer prices and many other variables. , the percentage of all workers participating in defined-benefit pension plans dropped from 35% in 1990 to 21% in 2005, while those in defined-contribution plans rose from 34% to 42%. Statistics as of year-end 2005 as provided by the Insurance Information Institute show that assets in retirement funds, including private defined-benefit plans, private defined-contribution plans. IRAs and local, state and federal retirement funds totaled about $12 trillion, whereas assets of all financial-services sectors totaled $49 trillion. For retirement assets by fund, see "Retirement Plan Assets" on page 67. The reality is that most people need to save 12% to 15% of their income for 30 years, including their employer match, to plan for a secure retirement, according to Sleyster. "That's not happening today," he said. "Most people aren't waking up to savings until they're in their late 30s, and they don't really ramp it up until they're in their 50s." What does the act mean to insurers? Below are assessments from executives of five major companies. EGTRRA permanency per·ma·nen·cy n. Permanence: tourists who were in awe of the permanency of the great pyramids of Egypt. Noun 1. should increase assets under management Assets Under Management (AUM) is a term used by financial services companies in the mutual fund and money management or investment management business to gauge how much money they are managing. and perhaps the number of plans. Contribution limits to qualified plans next year will be $15,500. Employees at least 50 years old may contribute an additional $5,000 catchup catch·up n. Variant of ketchup. . Were EGTRRA allowed to lapse (language) LAPSE - A single assignment language for the Manchester dataflow machine. ["A Single Assignment Language for Data Flow Computing", J.R.W. Glauert, M.Sc Diss, Victoria U Manchester, 1978]. , contribution levels would have returned in 2011 to $10,500. IRA contribution limits, now at $5,000 for those over 50, would have fallen back to $2,000. EGTRRA also simplified portability of plans, plan design and administration rules, said Peggy Coppola, vice president of business development at Guardian Life Insurance Co. "Now that we all have implemented them, have been using them and have gotten used to them, the loss of these provisions would have hurt," she said. "Making all of those permanent was a big statement and a big enhancement to everything people are doing in these plans." Automatic enrollment should increase the number of participants. Previous law did not prohibit automatic enrollment, but the new act makes it simpler and safer for employers. Coppola said studies show that companies with an automatic process have enrollment rates of about 90% of their employees, versus 60% to 70% in companies that don't. Steve Gradeless, vice president of business development for private-sector retirement plans at Nationwide Life Insurance Co., said a recent study by the Employee Benefit Research Institute indicates that 40% of employees not participating are likely to stay in the plan if automatically enrolled. "That could increase plan participants, although those participants will be typically lower paid and may not result in dramatic increases in plan assets," he said. Lawson said automatic enrollment should boost participation rates to about 80% from 65%. The act should overcome push-backs by employers to automatic enrollment. Tom Foster, national spokesperson for Hartford Retirement Plans, the group employer retirement plans of Hartford Life Insurance Co., said the act addresses the obstacles in the following ways: * In the past, if an employee opts out after a short time, the contributions become a plan asset, the employer must carry a small balance, and the employee can't get the money out--all unpleasant results. Under the new act, employees can get their contributions back within the first 90 days. * Automatic enrollment previously may have violated state pay-withholding rules. But the new act will preempt pre·empt or pre-empt v. pre·empt·ed, pre·empt·ing, pre·empts v.tr. 1. To appropriate, seize, or take for oneself before others. See Synonyms at appropriate. 2. a. state laws if an employer follows certain guidelines guidelines, n.pl a set of standards, criteria, or specifications to be used or followed in the performance of certain tasks. that the Department of Labor will set, and follows the notice requirements. * Employers who previously decided how to invest an employee's money could have caused themselves fiduciary problems stemming from claims the investments were inappropriate. On Sept. 26, however, the DOL DOL - Display Oriented Language. Subsystem of DOCUS. Sammet 1969, p.678. issued a set of proposed default investment options. As long as employers use them, they will be safe from Section 404c of the Employee Retirement Income Security Act The Employee Retirement Income Security Act of 1974 (ERISA), 29 U.S.C.A. § 1001 et seq. (1974), is a federal law that sets minimum standards for most voluntarily established Pension and health plans in private industry to provide protection for individuals enrolled in these plans. of 1974. "This [automatic enrollment] is a great way to train employees how easy it is to have the money withheld," Foster said. And once employees "see and feel" how qualified plans work, they are likely to actually increase their deferrals, he added. The act also provides a safe harbor from qualified-plan discrimination against lower-paid employees, said Lawson. Payroll escalation provisions should also increase plan assets. Programs that automatically increase payroll deferrals into qualified plans in ensuring years were a novelty, said Sleyster. "The act takes that from novelty to priority," he said. "The biggest problem in America is that people are not saving enough, and a contribution escalation program is a way to allow inertia inertia (ĭnûr`shə), in physics, the resistance of a body to any alteration in its state of motion, i.e., the resistance of a body at rest to being set in motion or of a body in motion to any change of speed or change in direction of to get people to save more." Under the new act, deferrals that start at less than 6% must be increased each year by 1% until reaching 6%. "I think what will happen is that the preponderance pre·pon·der·ance also pre·pon·der·an·cy n. Superiority in weight, force, importance, or influence. Noun 1. preponderance of employees who stay with one employer are going to wake up three to five years from now and, lo and behold be·hold v. be·held , be·hold·ing, be·holds v.tr. 1. a. To perceive by the visual faculty; see: beheld a tiny figure in the distance. b. , they're going to be saving a lot more money," he said. The non-spouse-beneficiary feature should open up new markets. Previously, only spouses could roll over assets in qualified plans into an inherited IRA. Non-spousal beneficiaries had to take a lump sum Lump sum A large one-time payment of money. or withdraw assets from the qualified plan within five years. Under the new act, anyone can roll over assets into an IRA. Coppola said Guardian is already working on a platform "that will allow us to go out to this market now." She said the change represents "an additional opportunity for taxpayers to manage inherited IRA assets." The act intends to strengthen existing defined-benefit plans, but it may be bad news for the prospects of new ones. There hasn't been a meaningful defined-benefit plan formed since the 1980s, said Sleyster. "If anything, this bill raises the risk of maintaining a DB plan, so it will further aggravate or accelerate the thinking of corporate plan sponsors, particularly in 2008 and beyond, to freeze or terminate plans. That was already well under way." Accounting changes will cause more balance-sheet and earnings volatility, and plan sponsors are trying to avoid volatility, he said. But cash-balance plans have become the future of defined-benefit. At issue in past years has been whether cash-balance plans were age discriminatory dis·crim·i·na·to·ry adj. 1. Marked by or showing prejudice; biased. 2. Making distinctions. dis·crim . The act has resolved that issue: They're not, they don't violate ERISA See Employee Retirement Income Security Act. ERISA See Employee Retirement Income Security Act (ERISA). , they don't violate the Internal Revenue Code The Internal Revenue Code is the body of law that codifies all federal tax laws, including income, estate, gift, excise, alcohol, tobacco, and employment taxes. These laws constitute title 26 of the U.S. Code (26 U.S.C.A. § 1 et seq. , and they have been "sanctioned," said Lawson. Even while there were lawsuits and the design was under question, they were making up 20% of premiums paid into the Public Benefit Guaranty As a verb, to agree to be responsible for the payment of another's debt or the performance of another's duty, liability, or obligation if that person does not perform as he or she is legally obligated to do; to assume the responsibility of a guarantor; to warrant. Corp., the federal guarantor guarantor n. a person or entity that agrees to be responsible for another's debt or performance under a contract, if the other fails to pay or perform. (See: guarantee) GUARANTOR, contracts. He who makes a guaranty. 2. of private pension plans, but employers were holding back from creating them, he said. He anticipates cash-balance plans "will become very popular" because they don't have the funding rules that traditional defined-benefit plans entail, they provide more certainty to employers, and they add some retirement guarantees for employees. Principal is the second-largest defined-benefit plan provider, Lawson said. The act provides sponsors and providers the right to give financial advice, but it needs definitive guidelines from the DOL and other governmental bodies. The act's language is open to debate, said Gradeless, while Lawson said negotiators are still working out the details. "We're still trying to sort through the details, but it's very positive that Congress recognized the need for advice to be given," Lawson said. The intent is to allow financial institutions, broker-dealers, agents and their affiliates to provide, as plan fiduciaries, investment advice under an arrangement that either provides that any fees, commissions or other compensation will not vary depending upon the investment options selected or that uses a computer model certified See certification. annually by an independent investment expert to provide unbiased advice. Gradeless said Nationwide "is in a unique position" because it has about $1.7 billion in managed accounts, one of the safe harbors proposed. The company introduced managed accounts in May 2002 and uses about 20 professional money managers. The act will promote the creation of retirement income streams through DB(k) plans and other new products. Lack of reliable income has always been a potential negative of defined-contribution plans, said Foster. "So the good news is that starting in 2010, we can offer a combined 401(k) and DB plan, all in a single plan and trust. "That will be a huge seller," Foster said. "As long as I as an employee work hard on accumulation, I also know I have a guaranteed income stream. That will be a real boon Boon A general term that refers to a benefit or improvement for investors. This can include such things as increased dividends, a stock market rally and stock buybacks. Notes: to both employer and employee. "A DB(k) will be available to employers with fewer than 500 employees. Currently, employers can offer a defined-benefit and a defined-contribution plan, but with more paperwork and cost than a DB(k) plan. Lawson said he and others have been working for six years to create the legal framework for a DB(k) plan. Also pressing for a DB(k) was the American Society of Pension Professionals and Actuaries The American Society of Pension Professionals & Actuaries or ASPPA is a national organization for career retirement plan professionals. The membership is comprised of the many disciplines supporting retirement income management and benefits policy. . The act, however, doesn't come soon enough to help people in their 50s or 60s nearing retirement, said Sleyster. Those people are "confused, uninformed and concerned about how they take lump sums of cash and turn them into retirement income that will last," he said. Sleyster said Prudential is now trying to incorporate into defined-contribution plans the accumulation and income guarantees available in the retail annuity market at or even before roll-over. "We have put an awful lot of energy behind it because we think it's a big opportunity, and it's a real need," he said. "If you could take some of those income benefits or guarantee benefits and attach them to the DC balance, I think you can offer people some real peace of mind they don't have today." Sleyster said Prudential might have a prospectus for these new products this calendar year and will be in the market with products very early next year. The act provides some new opportunities for financial advisers to engage their clients. One provision allows for direct payments of tax refunds Tax refund Money back from the government when too much tax has been paid or withheld from a salary. into IRAs, but not in excess of annual contribution limits. "It will probably be driven by the investment professional/financial adviser," said Gradeless. "It gives them another discussion topic with their consumer clients, and they need to probably carry that message to them because I don't know Don't know (DK, DKed) "Don't know the trade." A Street expression used whenever one party lacks knowledge of a trade or receives conflicting instructions from the other party. that the consumers are actually going to understand that that exists and avail themselves of it." Another provision allows direct rollovers Direct Rollover A distribution of eligible rollover assets from a qualified plan, 403(b) plan, or a governmental 457 plan to a Traditional IRA, qualified plan, 403(b) plan, or a governmental 457 plan or a distribution from an IRA to a qualified plan, 403(b) plan or a governmental from qualified plans to Roth IRAs Roth IRA An individual retirement plan that bears many similarities to the Traditional IRA. Contributions are never deductible, and qualified distributions are tax-free. A qualified distribution is one that is taken at least five years after the taxpayer established his/her first starting in 2008 if adjustable gross income is less than $100,000. Foster said this is a big deal for certified public accountants Certified Public Accountant (CPA) An accountant who has met certain standards, including experience, age, and licensing, and passed exams in a particular state. , who report that their clients are fearful of future higher tax rates and would be willing to pay current-year taxes to convert to a Roth. In accordance with another recent law, the $100,000 AGI (Artificial General Intelligence) A machine intelligence that resembles that of a human being. Considered impossible by many, most artificial intelligence (AI) research, projects and products deal with specific applications such as industrial robots, playing chess, limit is waived in 2010. Finally, the act saves the Tax-Saver's Credit, a tax credit of up to $1,000 a year for lower-paid employees who contribute to a 401(k) plan. Foster said many employers "never even knew about that. "The credit was set to expire this year. What is a DB(k)? A DB(k) is a new kind of retirement plan enabled by the Pension Protection Act and available beginning in 2010. It is a hybrid-a combination 401(k) and defined benefit plan Defined benefit plan A pension plan obliging the sponsor to make specified dollar payments to qualifying employees at retirement. The pension obligations are effectively the debt obligation of the plan sponsor. Related: Defined contribution plan . The concept was jointly developed by Principal Financial Group and the American Society of Pension Professionals & Actuaries. It will be available only to employers with fewer than 500 employees when the plan is established. Key Provisions: * Exempt from rules about discrimination against lower-paid employees. * Deemed to satisfy the actual deferral deferral - Waiting for quiet on the Ethernet. percentage and actual contribution percentage tests. * Funded through a single trust with a single plan document. * Files a single Form 5500. To be eligible, the DB portion must: * Provide a benefit of at least 1% of final average compensation (not to exceed 5-year average) per year of service (maximum 20 years). * Provide for 100% vesting Vesting The process by which employees accrue non-forfeitable rights over employer contributions that are made to the employee's qualified retirement plan account. Notes: after three years of service. * May provide a cash-balance formula that increases with participant's age. To be eligible, the 401(k) portion must: * Provide for automatic enrollment with a 4% automatic enrollment deferral rate. * Provide a matching contribution Matching Contribution A type of contribution an employer chooses to make to his or her employee's employer-sponsored retirement plan. The contribution is based on elective deferral contributions made by the employee. of 50% of at least 4% of pay. * Provide immediate vesting for the match. Among employer benefits: * Allows small employers to sponsor a defined-benefit plan with more predictable costs and lower premiums since the 401(k) matching specifications and defined-benefit formula are defined. Among employee benefits: * May encourage employers without a defined-benefit or defined-contribution retirement plan to establish one. Source: Principal Financial Group Learn More Guardian Life Insurance Company of America The Guardian Life Insurance Company of America (GLICOA) is a Fortune 1000 company founded in 1860 in New York, New York. It is the fourth largest mutual life insurance company in the United States of America. A.M. Best Company # 06508 Distribution: Career agents, independent agents and brokers Prudential Financial A.M. Best Company # 06974 (Prudential Insurance Company of America) Distribution: Career agents, independent agents and brokers, broker-dealers, banks Hartford Financial Services The examples and perspective in this article or section may not represent a worldwide view of the subject. Please [ improve this article] or discuss the issue on the talk page. Group A.M. Best Company # 06518 (Hartford Life Insurance Co.) Distribution: Independent agents and brokers, broker-dealers, marketing organizations Nationwide Life Group A.M, Best Company # 70350 Distribution: Independent broker-dealers, wirehouses, financial institutions and planners Principal Financial Group A.M. Best Company # 06150 (Principal Life Insurance Co.) Distribution: Career and independent agents, intermediaries of employee benefits experts For ratings and other financial strength information about these companies, visit www.ambest.com.
Timeline for Pension Protection Act Provisions
Effective Upon Enactment of the Law
All * EGTRAA permanence
Plans * No 10% penalty for reservists' early withdrawal
Defined * Nondiscrimination declaration
Benefit * Elimination of cash balance plan "whipsaw"
(DB) * A + D conversion from traditional DB to cash
balance plans
* 3-year vesting requirement for cash balance plans
* Airline funding relief
* Increased deduction limits
* DB 415 limit changes for cash benefits
* Permissive service credits--DB governmental plans
* Waive 10% penalty for public safety workers
Defined * ERISA preemption for automatic enrollment
Contri- * Increased DC deduction for combined DB/DC plans
bution
(DC)
Nonqualified * Restrictions on funding executive compensation plans
Plans * New provisions for tax treatment of corporate-owned
life insurance
IRAs * Tax-free distribution to charity
2007
All * Timing of benefit statements
Plans * Expand 90-day Qualified Joint and Survivor Annuity
notice and consent period to 180 days
* Rollover by non-spouse beneficiary
* Rollover of after-tax contributions
* Form 5500 changes
Defined * Phased retirement distributions
Benefit * Maximum limit on Pension Benefit Guaranty Corp.
(DB) premiums for small plans
Defined * Faster vesting of employer contributions
Contri- * Participant investment advice options for plan
bution sponsors
(DC)
Nonqualified
Plans
IRAs * Index IRA limits
* Income tax refund to IRA
2008
All * Joint and 75% survivor annuities (DB and money
Plans purchase plans)
* Direct rollover to Roth IRAs
Defined * DB funding rules
Benefit * Determination of "at-risk" plans
(DB) * Benefit restrictions for underfunded DB Plans
* Added disclosures for DB plans
* PBGC 4010 disclosure for underfunded DB plans
* Calculation of PBGC variable rate premium
* Calcution of DB lump sum distributions
(phase-in begins)
* Interest rate credit for cash balance plans
* Three-year vesting requirement for cash balance
plans in existence on 6/29/2005
Defined * Automatic enrollment safe harbor
Contri- * Mapping of investment options
bution * Eliminate DB/DC combined deduction limit
(DC) * Timing of taxation of actual deferral percentage/
actual contribution percentage refunds
Nonqualified
Plans
IRAs
2009
All * Plan amendments
Plans
Defined
Benefit
(DB)
Defined
Contri-
bution
(DC)
Nonqualified
Plans
IRAs
2010
All * DB(k) plans
Plans * Long-term-care
insurance riders
Defined
Benefit
(DB)
Defined
Contri-
bution
(DC)
Nonqualified
Plans
IRAs
Upon Issuance of Regulation
All * Required minimum distributions for
Plans government plans
Defined
Benefit
(DB)
Defined * Default investment options
Contri- * Safest available annuity standard for DC plans
bution * Expand participant hardship withdrawals
(DC) * Expand the PBGC missing participant
program to DC plans
Nonqualified
Plans
IRAs
Note: The effective date of each provision may vary according to the
plan sponsor's plan year or tax year.
Source: Principal Financial Group.
Retirement Plan Assets
($ Billions)
Type of Plan 2001 2002 2003
State/Local Government Pensions 2,207 1,931 2,344
Private Defined Benefit 1,686 1,409 1,680
Private Defined Contribution 2,231 1,900 2,347
Individual Retirement Accounts 2,619 2,533 2,991
401(k) Plans (subset of Private DC) 1,682 1,580 1,978
Type of Plan 2004 2005
State/Local Government Pensions 2,572 2,722
Private Defined Benefit 1,811 1,769
Private Defined Contribution 2,662 2,844
Individual Retirement Accounts 3,336 3,667
401(k) Plans (subset of Private DC) 2,267 2,443
Sources: Insurance Information Institute, Federal Reserve Board of
Governors, Securities Industry Association, Investment Company
Institute
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