Pension Act helps small business employees

President Bush signed the Pension Protection Act of 2006 into law Aug. 17 after it passed by wide margins in both the U.S. House of Representatives and Senate.

The law, sponsored by Rep. John Boehner (R-OH), addresses regulations on automatic-enrollment retirement plans and investment advice and makes permanent several short-term laws passed in 2001.

The law addresses a range of retirement planning issues that affect both employers and employees.

“It makes saving easier, more user-friendly,” said Brian Allen, president of Pension Consultants Inc. “It’s definitely a positive.”

Permanent provisions

The Employee Retirement Income Security Act of 1974, was the first law to set standards on private industry pension plans.

Since the original law, additional acts have been passed to provide more security and encourage saving, including the Economic Growth and Tax Relief Reconciliation Act of 2001. EGTRRA put into place a number of changes for retirement plans, among other areas.

“… It expanded several provisions of pension plans, made the amount you could put in greater so people could save more,” Allen said.

The law, however, included a sunset clause that would cause the new rules to revert back to the prior standings unless further legislation was passed. The law was scheduled to sunset on Jan. 1, 2011.

“The first major thing the Pension Protection Act accomplished was it made permanent all of those provisions,” Allen said, “which really saves a lot of headaches.”

Making EGTRRA’s provisions long-term is particularly good news for small-business owners.

“Probably the biggest deal for small companies would be the permanency of the EGTRRA provisions, because that did allow small-business owners to put more money into their retirement plans,” Allen said. “And the fact that they’re not going to have to go back to the old provisions in 2011 will really make a difference for the typical small-business owner.”

Automatic participation

One aspect of the Pension Protection Act is that it encourages more people to save for retirement, and it makes the process easier for everyone involved.

According to the law, employers now have the ability to automatically enroll new employees in a retirement plan that takes money from the employees’ paychecks and puts it directly into a retirement funds, often after a waiting period set forth by the company.

Prior to the Pension Protection Act, “the employee would have to go to the employer and say, ‘Now that I’m eligible, I want to put in that 3 percent or 4 percent or 5 percent.’ Now, it’s going to put the emphasis on the employee to have to opt-out of it,” Allen said. “From a governmental standpoint, that’s going to mean a lot more people are saving money and hopefully it will increase the savings rate for the entire nation.”

Dan Ruggeri, partner with Employee Benefit Design, said the automatic enrollment feature of the new law will take pressure off of Social Security.

“Social Security is in big trouble, and this is one process that will help mitigate the crisis that we’re heading toward,” he said.

Ruggeri hopes that encouraging saving and planning for the future will be an alternative to raising Social Security taxes to cover a future shortfall.

He said that when Social Security was established, there were 16 workers for every retiree. Right now, there are three workers per retiree, and within the next 20 years there will be only two.

“The way the current plan is working, we’re in trouble,” he added.

Offering investment advice

Though past legislation has made it difficult for employers to give investment advice to employers, the Pension Protection Act sets regulations for giving such advice, and allows companies to provide it. Allen said that aversion to employer-issued investment advice was due to the fear that if the advice didn’t pan out well, the employer would be sued.

The two types of advice that the Pension Protection Act allows employers to give decreases potential liability.

The first option is to provide a financial adviser who has no conflicts with the advice he is giving. It would be wrong under this option if the adviser would receive more commission if money is invested in one fund instead of another. Because of the higher commission, it would be considered conflicted advice and could cause employer liability.

The second option is a computer-driven model that is also nonconflicted.