Companies & Industries

What the New Pension Law Means to You


When traditional pension plans were the primary additional source of retirement income—other than Social Security—you didn't have to spend much time nurturing your retirement savings or understanding how the system functioned. You worked, the company put the money away for you, and the company calculated what it owed you. When you retired, the checks arrived faithfully in the mail.

Except for unusual cases, you didn't have to worry about the company suddenly closing down the plan or changing the rules or cutting the benefits. Now, just about everyone faces drastically different challenges in preparing for retirement. Because of the seemingly inexorable trend toward closing down traditional pension plans, even employees who still have such a plan face the same challenges as those who don't. Everyone has to navigate a maze of programs and tax incentives for saving, search their monthly budget for savings that can go into a 401(k) or IRA without compromising their lifestyle, and invest the money so that it increases in value rather than shrinks.

FULLER DISCLOSURE. For some time the federal government has required employers to offer basic tools to help employees keep abreast of developments in their plans— whether traditional or defined contribution—and avoid unpleasant surprises. But in response to crises in pension plan funding, the Pension Protection Act signed on Aug. 17 contains a spate of new disclosure requirements you should be aware of and use. Some of the new notices will be sent to people in both traditional and defined contribution plans; others are only for participants in traditional plans.

Current law provides for annual "pension benefit statements" to participants in their employers' plans, but H.R. 4—the bill's actual name—will require employers to give you more detailed information more often. About 5% of employers don't allow employees to manage the investments in their own accounts, and some individuals choose not to. If you are one of these, your employer is supposed to send you a benefit statement once a year. The law, which is effective starting Jan. 12, 2007, allows the information to be sent electronically.

But if you have a 401(k) or similar account and are managing your own investments, you'll be entitled to a quarterly statement that contains information that should make you stop and think about your account: the value of each investment, an explanation of the importance of diversifying investments, and a warning against allowing one investment, such as employer stock, to exceed more than 20% of your account.

STOCK WARNING. One of the loudest messages that emerged from Enron and other recent corporate crises has been the danger of putting too much employer stock into a retirement account. Starting in 2007, in addition to sending you the notice already mentioned, the company will be required to alert you 30 days ahead of time each time you're eligible to sell your company stock.

After years of lobbying by the financial services industry, starting Jan. 1, 2007, H.R. 4 will allow companies to arrange for investment advisers to counsel employees on how to invest money in their retirement accounts (see BusinessWeek.com, 8/18/06, "Deciphering the New Retirement Law").

To guard against errors of omission (such as not revealing rates of return on a particular investment) and commission (such as failure of an adviser to reveal a fee he'll receive for selling a product), the adviser will have to give each recipient a notice covering issues including the investments' track record, fees to be charged, his relationship to the investments being offered, and the employee's right to arrange separately for advice from a different adviser.

MORE INFO. If you have a traditional pension, your employer will be required to send you a personal benefit statement once every three years. But you'll also receive additional, annual information designed to help you assess the health of your plan. The "annual plan funding notice"—which must cover the last two years and the current year—will describe how close the plan is to meeting its funding targets, the plan's funding policy and asset allocation, how many people are currently receiving a company pension, and how many are projected to receive retirement benefits.

If the plan is not meeting its funding targets, the notice must describe steps being taken to remedy the shortfall. The first year for the reports is 2008, and the company must provide them within 120 days after the plan year (or, for companies with 100 or fewer employees, along with the plans' annual report).

In addition, if a plan is failing, or required to shut down by the federal Pension Benefits Guaranty Corp., anyone potentially affected will now have a right to see all the information about the termination that was sent to the PBGC within 15 days of the company's filing. Government officials must design model formats for the notices described here as well as for others required by the new law. Still, if past experience is a guide—especially with an enormous, complex bill like H.R. 4—they may not all be ready in time for the implementation deadlines.

But you don't have to wait for an official notice to start asking questions—of yourself, or your employer. If the answers might help you adjust or improve your financial strategies for retirement, sooner is better than later.


Race, Class, and the Future of Ferguson
LIMITED-TIME OFFER SUBSCRIBE NOW

(enter your email)
(enter up to 5 email addresses, separated by commas)

Max 250 characters

 
blog comments powered by Disqus