Pension Protection Act Streamlines Retirements
The avalanche has begun. This year, the first of some 79 million baby boomers will turn 62, triggering an uptick in retirements that soon will feel like an explosion. And although many of these boomers are entering retirement at 62 when they can begin collecting Social Security benefits, retirees today and into the future will need more than Social Security to ensure a secure retirement.
For many workers, retirement security will be multifaceted, involving a mix of Social Security, personal savings and employer-based retirement funds provided through a traditional defined-benefit plan or a more widely used defined-contribution plan, like a 401(k).
Although defined-benefit and defined- contribution plans are at the core of many Americans’ retirement futures, the laws governing these plans were, until not long ago, woefully stuck in the past. In fact, until Congress enacted bipartisan pension reform legislation in 2006, our nation’s retirement security laws were largely reflective of a 1970s workplace, designed to meet the needs of 1970s workers.
Thankfully, Congress recognized the pressing need for pension reform and acted accordingly. After years of thorough examination, thoughtful legislative development and careful coalition-building, Washington restored common sense to our nation’s pension system through enactment of the Pension Protection Act. Thanks to those reforms, today’s retirement security laws match the new realities of the 21st-century economy, meaning that more U.S. workers will be able to count on their retirement savings being there for them when they need it.
The Pension Protection Act includes tough new funding requirements to ensure employers adequately and consistently fund their pension plans, provides workers with meaningful disclosure about the financial status of their benefits and protects taxpayers from a possible multibillion dollar bailout of the Pension Benefit Guaranty Corp.
When the Pension Protection Act became law, most of the attention was paid to its reforms to traditional defined-benefit plans. It was important to ensure the solvency of these plans, and the law did exactly that. But for most of today’s workers, employer-sponsored retirement benefits are far more likely to be offered through 401(k)-type plans. Through a 401(k), workers are able to invest pre-tax dollars, often matched by their employer, in an account that can follow them from one job to another. For today’s mobile work force accustomed to personal ownership, these savings vehicles play a key role in retirement planning.
Recognizing the growing importance of defined-contribution plans, the Pension Protection Act encouraged automatic enrollment and automatic deferral increases so that more workers would be able to take advantage of 401(k) savings over the course of their careers. Research has shown that automatic enrollment can significantly increase worker participation, thereby increasing employee savings. We recognize that Americans want to save for their retirement, and we needed to make it as straightforward as possible for them to do so.
The law also permitted workers to save more through tax-advantaged retirement savings plans by making the increases in annual 401(k) and individual retirement account contribution limits permanent.
Of all the reforms aimed at empowering workers who prepare for retirement by saving in a 401(k), perhaps the most important was the law’s effort to ensure workers would be able to benefit from sound investment advice. Before the Pension Protection Act was enacted, an outdated law barred employers from providing their workers with access to a qualified investment adviser. That left far too many workers without the knowledge or assistance to choose appropriate investments that would help maximize their retirement savings.
The economic challenges our nation currently is confronting underscore the need for sound, stable retirement policy. Retirees face the same economic uncertainties that all Americans are grappling with, from rising health care costs and fuel prices to an unstable financial market. As Congress moves forward with both short- and long-term reforms to shore up the economy, the same vigilance must be paid to our retirement laws.
Looking to the future, 79 million baby boomers and the generations that follow them will have a brighter, more secure retirement ahead thanks to the pension reforms enacted less than two years ago. Our job now is to allow a good law to work, while remaining diligent in our responsibility to anticipate and solve future challenges to Americans’ retirement security.
One such area where additional reforms are being explored is through disclosure for 401(k) plans. The Education and Labor Committee has held a number of hearings examining the information that is made available to both plan sponsors, such as employers, and to workers themselves. At the same time, the Department of Labor has been engaged in a number of regulatory initiatives aimed at improving disclosure to workers of fees and other key plan information. These efforts are welcome.
As we learned with the bipartisan reforms enacted in 2006, changing our nation’s retirement security laws is not a task to be taken lightly. All agree that workers and retirees want and need meaningful disclosure so that they fully understand their retirement future. At the same time, we must be mindful that volumes of complex information may do workers more harm than good if workers do not understand it, if it leads to poor choices or if the quantity of information begins to overtake the quality.
As Congress looks more closely at proposals to reform worker retirement laws, the most important thing we can do is follow the path established by the Pension Protection Act: thorough examination of our challenges, thoughtful legislative development that foresees and averts harmful unintended consequences, and careful coalition-building that ensures agreement among employers, workers and experts.
Rep. Howard McKeon (R-Calif.) is ranking member on the Education and Labor Committee.