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Pension Protection Act of 2006 offers pensioners some good news |
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This article, the second of a continuing Senior News series on the newly enacted Pension Protection Act (PPA) focuses on some of the retiree-friendly provisions of the act regarding 401(k) and other types of employee-sponsored profit-sharing plans and Individual Retirement Accounts.
There is a provision of the PPA that increases the contribution limit for these plans on a permanent basis. While this is seen as retiree friendly by some, it is controversial because primarily only those earning more than $75,000 per year have been in a position to take advantage of the increased limits in the past, according to the National Women’s Law Center in Washington D.C., citing a study by the Urban-Brookings Institute Tax Policy Center. Hence these provisions decrease the tax base overall in a way that only benefits higher earners for the most part.
Other savings-related provisions in the PPA more clearly apply to all income earners, and one, the Saver’s Credit, is exclusively for mid- to lower-income earners. Single earners making less than $25,000, heads of households making less than $37,500, and married, joint filers making less than $50,000 per year qualify for some relief under this provision.
The Saver’s Credit reduces the amount of income tax owed. It was originally enacted in 2002 but was due to expire this year. The PPA has made it permanent and has increased the income limits. Those who will benefit most are single individuals making less than $15,000, heads of households making less than $22,500, or joint filers making less than $30,000 (these amounts will be indexed for inflation). Those who fit this criteria will receive a 50 percent credit on their taxes for up to $2,000 of their own earnings they have deposited into an employee sponsored retirement plan or an IRA. Higher income earners, within the limits of the Saver’s Credit, will receive a lesser credit. Unfortunately, though it was on the table in negotiations when the congressional committee hashed out the terms of the PPA, at this time it is only a credit, and not refundable if the taxpayer doesn’t owe any taxes.
A provision of the PPA that serves to protect all retirees, regardless of income, is a lessening of restrictions on employer stock divestment. This provision is important in terms of safeguarding pension accrual This is relevant when the employer’s stock is at risk and the employee wishes to divest their account of such stock in favor of healthier equity choices. An employee may direct the plan administrator to divest their account of employee stock in favor of increased diversification. This can be done without a waiting period for the portion of elective deferrals attributable to the employee’s own contributions, on at least a quarterly basis. If an employee receives contributions from the employer in the form of an elective deferrals matched by employer stock, they can (with some exceptions) divest such stock in favor of other investment vehicles, on at least a quarterly basis, as long as they have completed three years of pension service.
Finally, the PPA allows for automatic enrollment of employees into 401(k) type plans, so that employees will have to affirmatively opt-out of such plans if they do not wish to participate. Though there is some controversy about this provision as well, studies over the last few years have shown that this does encourage increased employee savings and overall participation in employee-sponsored defined-benefit plans. The PPA also allows for reduced fiduciary liability for employers and plan administrators when administering asset-allocation and default investments and independent professionally managed accounts. This allows employees to choose a managed account rather than being required to make their own choices as to how their money should be invested. It also allows the employer to put the assets into a managed account when the employee has not exercised the option of choosing their investments. Now the employer is safeguarded from liability by offering, for instance, investment in a life cycle fund for these situations.
Again, this provision could be controversial but studies have shown that that many employees lack both the motivation and the skills to manage their own 401(k) plans which can result in the misuse or under use of such plans, to the detriment of the employee being able to accrue an adequate retirement savings. This is particularly relevant as companies are foregoing traditional defined-benefit plans with life time annuities and employees are left with only the defined contribution, 401 (k) savings type retirement plans. The provision calls for the Department of Labor to issue regulations regarding appropriate investment options for these accounts. According to the Retirement Security Project, this provision will ultimately increase employee savings, because without this safeguard employers will be unwilling to offer these options. For more information on this provision, go to http://www.retirementsecurityproject.org. For more information regarding the PPA in general and how it affects plan participants go to www.pensionrights.org. |
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