WASHINGTON — Congress this year might legitimize two of the most controversial issues dogging employers — hybrid pension plans and investment advice to retirement plan participants.
Lawmakers are expected to deal with both issues when they open discussions over the large pension bill soon.
Since the late 1990s, hybrid pension plans, particularly cash balance plans that incorporate 401(k)-type features within defined benefit plans, have been mired in controversy over whether they discriminate against middle-age and older workers.
The stakes are high: There were an estimated 1,800 hybrid plans at the end of 2003, according to the latest data from the Pension Benefit Guaranty Corp., and some of the nation's largest employers are embroiled in legal disputes over the legitimacy of the plans.
Although both the Senate and House versions of the pension bill passed late last year allow new hybrid plans, lawmakers in both chambers punted on the issue of whether existing plans are discriminatory.
In recent weeks, Rep. John Boehner, R-Ohio, chairman of the House Education and the Workforce Committee, and Sen. Charles E. Grassley, chairman of the Senate Finance Committee, have expressed sympathy over employers' dilemma regarding hybrid plans and might be willing to legitimize both existing and new hybrid plans, sources said. The two are among key lawmakers who will be involved in negotiating differences between the Senate and the House versions of the pension legislation.
"Employers would love to get something that is retroactive and proactive and has the least amount of mandates," said Bill Sweetnam Jr., a partner at Groom Law Group, Washington. Mr. Sweetnam, previously benefits tax counsel at the Treasury Department who now represents employers with hybrid plans, is among the many who are lobbying legislators to confirm the legality of these plans.
Mr. Sweetnam and others representing employers say it is crucial that Congress deal with hybrid plans because it might be the only way employers are willing to continue sponsoring defined benefit plans. Already, several large sponsors of hybrid plans have opted to freeze the plans in the face of continuing uncertainty over their legal status.
Most recently, International Business Machines Corp. announced that if would freeze its $48 billion cash balance plan (Pensions & Investments, Jan. 9, 2006). And Verizon Corp. also froze its $39.2 billion cash balance plan (P&I, Dec. 12, 2005).
"The developments in the broader defined benefit system have sensitized people … for the need to clarify this," said James M. Delaplane Jr., partner at the Washington law firm of Davis and Harman.
The precipitous decline in the number of traditional pension plans and the shift to defined contribution plans has also made it essential for participants to get financial planning advice on managing their investments, Mr. Delaplane said.
The House version of the pension legislation includes a bill sponsored by Mr. Boehner that would permit retirement plan providers to offer investment advice to plan participants.
The Senate version of the bill would only permit independent purveyors of investment advice, but not plan providers.
Other open issues likely to be resolved during the Senate-House conference on the pension bill are the stack of defined contribution provisions in the House bill that would make permanent the higher contribution limits and benefits enacted as part of tax law changes in 2001 scheduled to expire at the end of 2010. While there's broad support for these provisions, the steep price tag, an estimated $30 billion, might make it difficult for lawmakers to keep these provisions in the pension legislation, some sources said.
"Finalizing (the Economic Growth Relief and Tax Reconciliation Act provisions) is something that definitely needs to be done, but it's not clear in the current economic environment that it's something that can be done," said Kyle N. Brown, retirement counsel at Watson Wyatt Worldwide, Arlington, Va.
But Ed Ferrigno, a lobbyist with the Profit-Sharing/401(k) Council of America, for whom permanence of the defined contribution provisions is the top issue, is hopeful that lawmakers will realize that it makes more sense to include the provisions in the bigger pension bill, despite their cost, rather than let the provisions expire, and extend them year after year.
"If the provisions have expired, come Jan. 1 what do you tell participants, record-keepers, the IRS … it would be absolute insanity. Everyone recognizes that," he said.
Other issues on the table during the Senate-House conference are key differences between the two bills on overhauling the pension funding rules:
• The House bill lets employers average the interest rate on corporate bonds in calculating their pension liabilities over three years; the Senate bill permits employers to average the rate over only one year.
• The Senate bill includes one provision that would make it easier for employees to diversify out of employer stock given as a matching contribution; the House version does not include this package.
• The House bill includes a long list of provisions that would water down conflict-of-interest provisions in federal pension law and make it easier for hedge funds to attract pension assets; the Senate bill includes only a stripped down version of the list.
• The Senate bill would link funding rules and PBGC premiums to the credit rating of the employer. The House does not have a similar provision.
• Both bills would permit employers to draw down credit balances built up through excess contributions in the past in taking into account their current year's contributions, but the differences between the two bills need to be resolved.
Sources say it's too soon to predict how these provisions will be reconciled. "These are all member-level issues, and it depends on what the conferees want to do about these things," said Lynn Dudley, senior counsel at the American Benefits Council, Washington.
