Is this the end of traditional pensions?
By William Neikirk
By William Neikirk
WASHINGTON — The pension bill that President Bush plans to sign into law today will give a boost to 401(k) retirement savings plans and impose tougher funding requirements that could cause more companies to freeze or abandon the old-fashioned pension that once was common in America.
The 907-page measure, the most extensive revamping of the nation's pension laws in a generation, represents a decided shift in government policy. It favors such defined-contribution retirement plans as the highly popular 401(k), to which employees contribute money from their paychecks, at a time when the number of Americans with company-funded pensions has been gradually declining.
Not only would the legislation give companies the right to automatically enroll new employees in their tax-deferred 401(k) plans, but it also would allow financial companies in which employees invest to offer them investment advice, a change that critics called a conflict of interest. Under the bill, the Labor Department would have to approve the way investment advice is given.
At the same time, the bill would force companies with traditional defined-pension plans to move toward fully funding them over a seven-year period. Troubled airlines would get 17 years to meet the legislation's new standards.
Representatives of both business and labor said that the tougher standards could cause more firms either to freeze or drop their defined pension programs — a threat frequently made by corporations when the legislation was before Congress.
"The biggest long-term threat is that well-funded (pension) plans will exit the system," said James Klein, president of the American Benefits Council, an employer-backed group. He predicted that more companies would freeze their pensions as a result of having to put up more resources to fund their plans.
The measure also sanctions the use of cash-balance pension plans, essentially annual company contributions to workers that can be built into retirement nest eggs. Firms had virtually stopped offering them after courts had ruled that they discriminated against older workers.
The bill's provisions favoring 401(k) savings plans is clear recognition that they are the "wave of the future," said Matt Moore, senior policy analyst for the National Center for Policy Analysis, a think tank based in Dallas.
About one-third of workers typically don't sign up for these plans, he said, but as company-funded pension plans begin to dry up, the 401(k) plan is gradually replacing it. Nearly 75 percent of workers ages 40 to 59 belong to 401(k) plans, Moore said, while only 47.5 percent of participants are those ages 29 and under, many of whom tend to be lower-income workers.
"But it pays to start sooner rather than later," he said. "Automatic enrollment of new employees will help workers, particularly younger workers, build a nest egg for retirement."
Mark Warshawsky, a former Treasury Department official, said research shows that once people find they automatically belong to 401(k) plans, they tend to stay. "It's something they don't have to think about," he said.
Karen Ferguson, director of the Pension Rights Center, an advocacy organization partially supported by labor unions, lamented the change. "It certainly will accelerate the shift from secure pensions to insecure do-it-yourself savings arrangements. And that is exactly what the bill was intended to do," she said.
More than 40 million Americans have 401(k) savings plans, and millions more have individual retirement accounts.
Once companies automatically enroll workers in 401(k) plans, the bill would require them to initially put 3 percent of a worker's pay into accounts. This could be increased to 6 percent over the following three years. Companies would be required to fully match the first 1 percent of pay, and contribute half of the next 5 percent of pay.