Even though some provisions of the new landmark pension law don't take effect for 16 months, HR professionals need to start educating themselves immediately.
The changes amount to the most sweeping reforms of pension law in more than 30 years. At the same time it passed this law, Congress shot down a $2-per-hour increase in the federal minimum wage.
The pension law, signed by President Bush on Aug. 17, strengthens retirement-plan funding, encourages employee savings and shores up the federal Pension Benefit Guaranty Corp. It will also require employers to make tough decisions, including:
What to do with that DB plan? Because many companies underfunded their defined-benefit (DB) pension plans, the new law requires employers to fund those plans (within seven years) to cover 100 percent of liabilities instead of the current 90-percent level.
The result: About 30,000 U.S. employers will need to devote more dollars to their retirement systems. The added costs will drive some employers to revamp or drop their DB plans.
The law also gives new legal protections to employers who want to convert their traditional pension plans into cash-balance or hybrid plans. The law protects those companies from age-discrimination lawsuits by older employees who'd claim they were harmed disproportionately by the switch.
Should you automatically enroll employees in the 401(k)? Currently, most employers require employees to opt into their company's 401(k) plan. But the new law gives new incentives to automatically enroll employees in the 401(k) plan when hired (unless the employee opts out).
While some employers have already switched to auto-enrollment, most held back and awaited Congress's blessing. Now it's here. The new law encourages automatic enrollment by setting standards under which employers would gain legal protection for their auto-enroll plans (see box below).
Plus, the law makes it easier for employers to automatically increase the percentage of employees' salaries directed to the 401(k) plan.
Who provides investment advice? The law eases conflict-of-interest rules, giving financial companies that manage retirement accounts more ability to offer advice to employees. Financial firms can offer investment advice if it's based on a computer model certified as bias-free. The new law also:
- Makes permanent tax laws that raise annual contribution limits for IRAs and allow tax-free withdrawals from Section 529 college savings plans.
- Requires plan administrators to comply with tougher disclosure rules.
- Allows direct rollovers from retirement plans to Roth IRAs.
Online resource: To read a detailed analysis of the law, go to www.aspa.org/government/comment08-02-06.htm.
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