Pension act amendment facing gridlock

WASHINGTON — Efforts to fine-tune critical parts of the massive, new Pension Protection Act of 2006 could be stymied by political gridlock now that Democrats control Congress and both parties have begun positioning for the 2008 presidential race.

Retirement industry lobbyists had been hoping a legislative amendment would pass that would make key provisions in the new pension law more workable. Now, they fear Democrats will use their newfound power to include major regulatory changes in any such legislation, alienating Republicans and employers alike.

"If this bill begins to look like a Christmas tree, the real question for employers will be whether they really want it or not," said Mark Ugoretz, president of the ERISA Industry Committee, which represents major employers in Washington.

The electoral victory of the Democrats is expected to affect other fronts, as well:

cHearings likely will be held to re-examine allegations that fees charged to 401(k) plan participants are excessive.

cHearings also are expected on concerns that executive compensation is getting out of hand and shareholders lack sufficient say over the issue.

cThe political shift could spur the adoption of new legislation to regulate hedge funds.

cAn effort to amend the investment advice provision in the Pension Protection Act is expected to be blocked.

cEfforts by American Airlines and Continental Airlines to revise the PPA to better level the competitive playing field between them and Northwest Airlines and Delta Air Lines could be stymied.

cLegislation to create an "automatic" IRA program could get additional momentum.

And because Democrats will hold key leadership posts in the Senate and the House next year, including in committees that write legislation affecting the investment and retirement industries, the Democrats will have new power to set the federal political agenda.

The chairmanship of the House Education and the Workforce Committee, which oversees retirement issues, is expected to go to Rep. George Miller, D-Calif. He will replace Rep. Howard McKeon, R-Calif., who played a leading role on the Pension Protection Act.

In addition, Rep. Charles Rangel, D-N.Y., is expected to become chairman of the House Ways and Means Committee, replacing Rep. William Thomas, R-Calif., who is retiring.

Chairmanship of the Senate Finance Committee is expected to pass to Sen. Max Baucus, D-Mont., from Sen. Charles Grassley, R-Iowa. Chairmanship of the Senate Health, Education, Labor and Pensions Committee is expected to go to Sen. Edward Kennedy, D-Mass., from Sen. Michael Enzi, R-Wyo.

Rep. Barney Frank, D-Mass., who has championed legislation to regulate hedge funds, is expected to become chairman of the House Financial Services Committee, replacing Rep. Michael Oxley, R-Ohio, who also will retire.

Messrs. Miller and Rangel have been known to make waves on industry issues. And they made no secret of their belief that the PPA failed to meet their expectations.

"I'm concerned that in the future, we'll look back on this bill as a Trojan horse that brought the end of the defined benefit pension system," Mr. Rangel said in a news release after President Bush signed the bill into law.

The switch at the Senate Finance Committee is expected to make the least difference, according to lobbyists and ERISA attorneys, because Messrs. Baucus and Grassley have established a strong tradition of working together.

Brian H. Graff, executive director and chief executive, American Society of Pension Professionals & Actuaries, Arlington, Va., said, "Frankly, I think we're very lucky that we got the bill done … before the new Congress."

Of course, "there's a possibility that the Pension Protection Act would be reviewed in light of its potential impact on employers' willingness to sponsor defined benefit pensions," said Mark Iwry, a non-resident senior fellow with the Brookings Institution in Washington. "On the other hand, the ink is hardly dry, Democrats are not of one mind on this and the president still holds the veto pen."

And because of the potential for a legislative stalemate, insiders say the prospects for major revisions in the new pension law, or any other controversial legislation, are slim.

In addition, "given the fact that the bill (the Pension Protection Act) just passed and that it had bipartisan support, there's not a lot of pent-up demand among Democrats to do retirement issues right off the bat," Mr. Graff said.

"I expect very little legislatively," added Bill Sweetnam, a partner at the Groom Law Group, Washington, and a former benefits tax counsel at the Treasury Department.

Instead, the Democrats are expected to use their new leadership posts to investigate the Bush administration and hold wide-ranging hearings aimed at laying the groundwork for future legislation.

Among the hearings expected is one to re-examine the fees charged to 401(k) plan participants.

Plan critics are concerned that excessive fees are being charged, depriving participants of reasonable returns on their investments. In a series of class-action lawsuits, participants have raised particular concerns about so-called revenue-sharing arrangements, the common industry practice of a mutual fund or other investment manager sharing part of the direct fee it gets from a plan with other service providers to the plan.

Another hot-button issue Democrats are expected to target for hearings is executive compensation. Critics are concerned that some executives are getting too much and shareholders lack the clout to rein in excesses.

Mr. Frank introduced legislation in November 2005 that would give shareholders a right to review and approve their companies' executive compensation plans. And in a statement on its website, Democratic members of the House Financial Services Committee complained Republican lawmakers refused to permit hearings on the measure.

One piece of legislation that might see the light of day in the near term is a measure to regulate the hedge fund industry, according to industry attorneys.

Mr. Frank introduced a bill last June giving the Securities and Exchange Commission authority to require hedge fund managers to register with the agency — a provision that would permit the SEC to monitor hedge funds.

Michael Tannenbaum, a hedge fund attorney and managing partner of Tannebaum, Helpern, Syracuse & Hirshtritt LLP, New York, said Mr. Frank's promotion to chairman of the financial services committee all but insures the lawmaker would promote his hedge-fund legislation. And Mr. Tannenbaum said he believes if the measure received bipartisan support, President Bush would sign it.

Steven Adamske, a spokesman for Mr. Frank said the lawmaker was still studying the issue. He added, however, that both Mr. Frank and Mr. Miller are concerned that public pension funds that are heavily invested in hedge funds could be endangering plan participants.

"When a public pension plan puts money into a hedge fund and then proceeds to lose a $100 million of the public pension plan's money, that's a political hot potato that impacts both sides of the aisle," said Nir Yarden, a hedge fund attorney with Bryan Cave LLP, New York.

The shift in political power is expected to spell doom for an industry effort to amend the investment-advice provision in the Pension Protection Act.

Money managers are concerned because the provision allowing them to give advice directly to 401(k) plan participants requires firms offering advice to charge a single flat fee, no matter what investment options the participants choose. Financial services firms are unhappy with that because managers usually charge much higher fees for some strategies than others.

Because many key Democrats had opposed the advice provision, ERISA attorneys said the switch in political power means money managers will turn to the Department of Labor for regulatory relief.

The shift in power could also complicate efforts by American Airlines Inc., Fort Worth, Texas, and Continental Airlines Inc., Houston, to win a legislative revision to the Pension Protection Act that would better level the competitive playing field between them and Northwest Airlines Corp., Eagan, Minn., and Delta Air Lines Inc., Atlanta.

At issue is a provision that gave Northwest and Delta 17 years to fully fund their defined benefit plans, while American and Continental only got 10 years.

William F. Quinn, an American Airlines vice president and chairman and CEO of American Beacon Advisors, Fort Worth, also said Delta and Northwest both got a discount rate of 8.85% to calculate their underfunding, while American and Continental are supposed to use a corporate bond rate — about 6% to 6.25% now — to calculate their own.

Overall, Mr. Quinn said, the ascension of the Democrats on Capitol Hill could be a positive for American's quest because major labor groups, which traditionally are allied with Democrats, have a stake in ensuring the health of American and Continental's plans.

"Democrats want to make sure these (pension plan) obligations get honored, which is what we want to do as well," Mr. Quinn said.

But ERISA attorneys said any legislation on the subject was likely to be loaded with controversial amendments that would make it hard to pass.

Some industry attorneys said Democratic control of Congress could also augur well for legislation to create an "automatic" IRA.

The legislation, recently introduced by Sens. Jeff Bingaman, D-N.M.; Gordon Smith, R-Ore.; and John Kerry, D-Mass., would essentially require companies without retirement plans that have been in business for more than two years and have more than 10 employees to offer an "automatic" IRA, featuring automatic enrollment and automatic deferrals.

"The advent of divided government probably makes it even more likely that Congress will give serious bipartisan consideration to the automatic IRA proposal," said Mr. Iwry, a former Treasury Department benefits tax counsel who has been promoting the proposal with David John, a senior research fellow with The Heritage Foundation, Washington.

"The one thing both parties have been able to agree on is the need to increase savings in general and savings for retirement in particular," said Mr. John. "The fact is there is strong support (for the proposal) — and there has been from the beginning — from Democrats and Republicans."

But Mark Warshawsky, director for retirement policy at Watson Wyatt Worldwide, Arlington, Va., and formerly assistant secretary for economic policy at the Bush administration's Department of Treasury, said the plan is unlikely to fly unless joined to a controversial proposal by President Bush to reform Social Security.

"I don't see that in this Congress," Mr. Warshawsky said.