After poring over the much-ballyhooed Pension Protection Act of 2006, this much seems clear: When it comes to saving for retirement, we have many opportunities. But more than ever, our retirement financial security is up to us.
The more than 900-page legislation, signed into law last month, is ostensibly designed to shore up the deficit-ridden federal pension insurance system and to strengthen defined-benefit plans that guarantee workers a lifetime pension.
But I agree with Ed Slott, a certified public accountant and retirement tax law expert in Rockville Centre, N.Y., who believes the law may have the opposite effect.
"There are so many new rules, hurdles, reporting and funding requirements that many companies might just say `the heck with this' and discontinue those plans," Slott said.
On the other hand, the new law makes it easier for workers to contribute more money to their retirement plans, including employer-sponsored defined-contribution plans such as 401(k)s and 403(b)s.
"If this does not get you saving for your own retirement, then you have really missed the boat here," Slott said.
The problem with defined-contribution plans--or the opportunity, depending on how you look at it--is that we, not our employers, are responsible for the investment decisions, and the results. Numerous studies have shown many workers don't contribute or contribute too little and invest too aggressively or too conservatively.
Addressing those concerns, the Pension Protection Act includes widely supported provisions--backed by both the conservative National Center for Policy Analysis and left-of-center Brookings Institution, for example--that provide incentives for employers to make certain decisions unless employees specifically opt out.
These decisions include automatic enrollment of new employees into 401(k) and 403(b) plans, automatic increases of contribution rates when workers receive a raise, and automatic investment in diversified portfolios. The law also will make it easier for employees who hold company stock in their plans to sell the stock to seek greater diversification.
"This is the first step in making 401(k)s more accessible and valuable to workers," said Matt Moore, senior policy analyst for the Center for Policy Analysis. Automatic enrollment--in which workers can opt out--could boost participation from the current 66 percent of eligible employees to 92 percent, according to estimates by the Employee Benefit Research Institute and the Investment Company Institute.
Another proposal endorsed by the center and the Brookings Institution, making a lifetime annuity the default payout option when a worker retires, was not included in the law, but proponents are hopeful the issue can be revived.
The Pension Protection Act does include a significant provision making permanent the higher contribution limits to employer defined-contribution plans and individual retirement accounts approved in 2001 but set to expire after 2010.
For example, the basic annual IRA contribution limit, now $4,000 and slated to rise to $5,000 in 2008, would have reverted to $2,000 in 2011. Many people "have been figuring on IRA contributions of $4,000 or $5,000 a year into their retirement funding, having no idea this was set to be scaled back," said Slott, editor of a national newsletter on IRAs (Web site www.irahelp.com). "But now their plan might just work out the way they thought."
The law also makes permanent a saver's credit, which would have expired after this year, for lower-income and middle-income taxpayers contributing to retirement plans.
Also made permanent are Roth 401(k) and 403(b) defined-contribution plan options that became available this year and would have expired after 2010. Under such plans, employees don't receive a tax deduction on their contributions as they do with a traditional 401(k) or 403(b). But they don't have to pay taxes when they take the money out in retirement.
Employers, many of them concerned about set-up costs, have been slow to offer these Roth plans. But "now that the future of the Roth 401(k) is secure," more employers are expected to offer the option, according to a briefing on the pension law by tax publisher CCH, a Wolters Kluwer business.
Roth plans can be particularly attractive to workers who expect to be in a higher tax bracket in retirement.
In research published in the July Journal of Financial Planning, certified financial planners Thomas P. Langdon, E. Vance Grange and Michael A. Dalton give the Roth option another nod.
One key advantage: Money in a Roth 401(k) or 403(b) can be rolled over directly and tax-free into a Roth IRA, eliminating taxable required minimum distributions after age 70½. Although the new law will allow converting traditional employer plans directly into Roth IRAs beginning in 2008, taxes will be due on such conversions.
Humberto Cruz is a columnist for Tribune Media Services. E-mail him at email@example.com.