The Pension Bill’s Significance

Lost in the noise of doctored photos, staged photos, staged filmings, thwarted attacks, useful idiot interviews, and political hit pieces disguised as objective journalism, is a monstrously large pension “reform” bill that somewhat lives up to its name. It has passed both Houses of Congress, and the President has said he will sign shortly.

Late last week, The Wall Street Journal, in a subscription-only piece, did a pretty good job of analyzing the high and low points of the legislation. After an agendized intro, it dug into the meat:

….. The current bill is an attempt to speed ….. (a) new era of individual responsibility along, as well as clean up the mess that Congress has made “guaranteeing” private pensions.

(The bill will) help individuals become smarter investors. For example, the bill would permit employers to retain financial advisers to provide investment counsel. This would seem to be Investing 101, but liberals and lawyers objected for years on grounds that Fidelity or Vanguard might steer employees to their own funds. Well, so what? It sure beats having employees pile all their cash into company stock, a la Enron. And as long as employees have a variety of investment choices, getting advice on diversification, or the right mix of stocks and bonds depending on age, is a big step forward.

Let’s stop there for a moment. The advice idea is good on paper; after all, a lot of people frankly don’t know what they’re doing, and make poor investment choices within their employer’s plan(s). But as much as in-company advice is needed, I wish that the legislation contained an ironclad prohibition against a financial adviser talking about any of his or her other services outside the sponsoring company’s retirement plans — yep, even if asked. And before you cry “freedom of speech,” remember that the adviser has been engaged to speak to or consult with employees about the company’s benefit plans ONLY. Discussion of other services and handling employees’ outside money has a great potential for adviser abuse and unavoidable legal exposure for employers. If an adviser leads the employee into risky outside investments that don’t pan out, even as a result of subsequent off-premises meetings, the employee is going to remember who made the introduction. I don’t see how employers can make employees sign any kind of waiver that could eliminate this problem.

Moving on:

The bill will also let companies automatically enroll workers in a retirement plan unless the employees choose not to join — which given human nature means higher participation in 401(k)s. The bill also makes permanent the higher annual IRA contribution limits that passed in 2001 but were set to expire in 2010. And, for the first time, Americans could direct part of their federal tax refund directly into an IRA.

The bill also has a provision, noted in this article from another source, giving employers the ablity to increase automatic contribution percentages in the earlier years of employment:

(The bill permits) automatic escalation of contributions. The goal is to set aside 3 percent of compensation by the end of the first year, 4 percent in year two, 5 percent in year three and 6 percent thereafter.

The previous two excerpts represent the good news. Of course the “permanence” means that it will take legislation to change things, but it’s an improvement over the ticking clock that has been in effect for most of the past 5 years.

Here are the specific takeaways, all of which take advantage of the “if you don’t see it, you won’t spend it” mentality:

• If you or anyone you know is automatically enrolled in a 401(k) at the beginning of employment, DON’T undo the enrollment. Instead, figure out if you really should be contributing more than your employer signed you up for, and start figuring out how to invest it.
• If you decide to stick with the automatic contribution level and your employer does escalate them, let it happen. You’re (hopefully) getting annual pay raises, so you should normally be able to afford an increase in your contribution percentage.
• Seriously consider taking advantage of an automatic transfer of part or all of any federal tax refund you receive into an IRA.

I’m not clear yet as to whether any refund directed into an IRA will be considered a current year or next year contribution. Though it would be more advantageous, applying refund to the current tax year could be a difficult calculation without tax preparation software.

The rest of the legislation has to do with trying to fix the rickety Pension Benefit Guaranty Corporation (PBGC), and to protect the traditional pension plans that the PBGC is supposed to be able to bail out if sponsoring employers go under. Though the bill’s provisions are horribly complex, but the bottom line is that Congress nibbled around the edges with a number of relatively small fixes and special favors without solving the real long-term funding problem in so many large-employer plans. Perhaps a growing economy and continued employer movement away from the traditional pension structure will prevent the train wreck many fear, but it’s more likely, as The Journal noted, that future Congresses are going to have to deal with the PBGC’s difficulties.