The Pension Protection Act of 2006 (H.R. 4), signed into law in August, is a far-reaching measure that contains provisions that will affect millions of Americans, not just the dwindling number of workers who are covered by pensions. Congress designed the law to prod workers into saving for their own retirement, among other goals.
Here are some highlights on how this law may affect you:
? Your employer may automatically enroll you in a retirement plan. The law encourages employers to adopt automatic enrollment of new employees into 401(k) plans. If you don’t wish to participate, you can opt out; before, employees had to choose to enroll in their company’s plan. The idea is to make employees’ procrastination work in favor of participation, not against. Your default contribution will be 3 percent of your gross income, rising automatically by 1 percentage point per year, up to 6 percent. (In addition, your employer may match that contribution, typically by 50 cents to the dollar.) The change is expected to raise participation in 401(k) plans to 92 percent of eligible employees from 66 percent, says Dallas Salisbury, president and CEO of the Employee Benefits Research Institute, a nonprofit research and educational organization. “Studies show that if people default in, they stay in,” he says. “People really would rather be saving, but they just don’t get around to it.”
– Investment advice comes to the office. Your employer now may offer you advice on how to invest your 401(k) money, which was prohibited before. The law allows the use of advice generated from computer models.
– Nonspouse beneficiaries can transfer retirement plan money into an IRA. If you’ve named someone other than your spouse—say, a domestic partner or child—as beneficiary of your retirement plan, at your death he or she now can roll the money over into an inherited IRA and take distributions.
– Education savings plans now are tax-free forever. If you’ve been saving for education through a Section 529 education savings plan, you can now rest assured. The tax-free status of 529 plan withdrawals is now permanent. It had been set to expire in 2010.
– Other tax breaks become permanent. The Saver’s Tax Credit, a tax benefit for lower-income individuals that was slated to expire, is here to stay. So are the higher contribution limits for IRAs that were established in 2001. The IRS will now annually adjust those limits for inflation. Also now permanent: catch-up 401(k) contributions for workers 50 and older.
Sen. Edward M. Kennedy (D-Mass.), a vociferous Bush critic, offered rare praise for the president’s support of the pension legislation. “In this case, Democrats and Republicans worked together and America’s workers and retirees came out the winners,” he said.
But critics of the law, such as Rep. George Miller (D-Calif.), called it a smokescreen, warning that some companies would face fewer requirements to fund their pensions. The Congressional Budget Office reported Wednesday that the new law would “lead to an increase in underfunding among plans that will be terminated over the next decade.”
“The bill did some good things but it would have been perfect if had been more aggressive,” former budget office director Douglas Holtz-Eakin said.
As for pensions, the law also instructs employers to disclose more financial information about traditional, defined-benefit pensions to plan participants, including assessments of the plans’ financial health.