President signs pension act -- Will you benefit?

August 23, 2006

Last week, President Bush signed the Pension Protection Act of 2006.  Although hailed as “the most sweeping reform of America’s pension laws in almost 30 years”, it really only helps the 22 million workers who already are covered by defined benefit pension plans.

If you are covered, the bill strengthens requirements to ensure that companies fully fund their pension plans. If you are not, however, it may mean you will be less likely to be offered a pension as a benefit, since pensions now cost companies more. Furthermore, the bill makes it easier for hedge funds to manage larger portions of pension funds, which will increase volatility in pension funds and the stock market overall.

For the 55 million who are not covered by pension plans, and must rely on 401(k)’s to fund their retirement, the bill offers a few minor advantages:

• Contributions will be allowed to increase along with the rise of inflation.
• Benefits can be assigned to a surviving domestic partner or child, not just a spouse.
• Companies can no longer force employees to keep their holdings in company stock.
• Employers will be more likely to offer automatic enrollment.
• Workers will be provided more information about the performance of their accounts.
• More professional advice about investing for retirement will be provided by employers.
• Makes permanent the higher contribution limits for IRA's and 401(k)'s that were passed in 2001, enabling more workers to build larger retirement nest eggs.

What It Means:
Not much. Although these are good changes, they will not provide the same kind of retirement for the Baby Boomer generation that their parents received. Unless you are covered by a defined-benefit pension plan, you are still responsible for saving enough money to fund your retirement. The law does not show you how to do that.

Action Steps:
First, find out if you are covered by a pension plan, and how much you can expect to receive. Second, start planning your retirement. If you need help, here are some suggestions:

1. Contact your financial planner.
2. Read any of the excellent books on the subject as listed in this web site’s “Recommended Reading” section.
3. Check out the “Retirement Planning 101” home study course we have just developed. It takes you through the steps of planning your retirement in less than ten hours...time and money well spent.

Source: The White House web site, Employee Benefits Research Institute web site