America once again has a Democratic president and Congress. Some welcome the change, but others find it ominous. Rush Limbaugh and Sean Hannity are in the latter category — insisting Democrats are planning for a government take-over of the 401(k) system.

“They’re going to take your 401(k) and put in the Social Security trust fund,” Limbaugh threatened last November.

The reality is that no legislator is advocating such a radical scenario, and, given the likely political fall-out, is unlikely to do so. The Democratic president and Congress, however, have already signaled a change in political direction for retirement plan policy — one less apt to emphasize self-reliance, and more likely to impose mandates on employers.

 

But with the financial crisis in full swing, legislators will likely place retirement plan reform low on the priority list, at least in the short term, say experts.

“In light of the financial crisis, the administration has other priorities,” says Kyle Brown, retirement counsel for Watson Wyatt. Indeed, retirement was largely ignored in the American Recovery and Reinvestment Act of 2009 (the “stimulus bill”) passed in February.

That does not mean, however, that all will be quiet on the retirement plan front. While not the primary focus, the retirement area will receive some attention, says Joan Bozek, the managing director for Merrill Lynch’s retirement group.

Retirement plans got legislative attention in December with the passage of the Worker, Retiree and Employer Recovery Act of 2008. While technical corrections to the Pension Protection Act of 2006 were WRERA’s main focus, it also contains provisions to help sponsors, retirees and participants during the crisis.

For sponsors, WRERA provides additional time to transition to new PPA funding rules. Due to unique market events, explains Brown, transitioning into the new rules this year would create hardships for sponsors. PPA, explains Bozek, requires defined benefit plans to aim for a 100% funding target in 2009. The target was 92% in 2008. WRERA, she says, eliminated the penalties for not meeting the 100% funding target this year, and maintains the 92% standard into 2009.

WRERA also provides for smoothing of assets, adds Bozek, allowing plans to consider funding targets by an averaging of assets over 24 months. This decreases the volatility, allowing plans to look at performance over two years.

Participants and retirees will benefit from WRERA’s one-year suspension of the minimum distribution rules from IRAs and qualified plans once someone reaches age 70 1/2 or retires. The requirement is temporarily suspended for 2009, says Kathryn Ricard, VP of retirement policy at the ERISA Industry Committee.

A WRERA provision mandating all plans allow non-spouse beneficiaries to roll over a deceased participant’s account into an IRA may be particularly of interest to advisers, says Bozek. If clients’ plans do not already allow this, she says, they need to be amended to conform.

Once the economic crisis is dealt with, Democrats have shown they would like to put their stamp on retirement plan policy. Chairman of the House Education and Labor committee, George Miller (D-CA), has already held hearings in 2008 and 2009 on whether 401(k) plans provide adequate retirement income, disclosure and transparency of plan fees. Whether the hearings will lead to legislation in the short term, however, is questionable. Bills will be introduced, but Ricard predicts little will be passed in 2009 or 2010.

The Obama administration, says Ricard, has shown interest in DC plans, indicating support for proposals requiring workers to partially annuitize lump-sum distributions from their plans.

President Barack Obama’s budget also aims to improve the retirement system by providing for an automatic IRA and an expansion of the saver’s credit. The IRA proposal requires employers who do not offer a retirement plan to enroll employees in a direct deposit IRA account, while participants could choose to opt out of the plan.

“I think it will be introduced and wouldn’t be surprised if it became law,” says Ricard. Brown sees this happening late in Obama’s term.

Retirement plan reform also stands a chance of being addressed as part of an overall tax package, says Bozek. The Bush tax cuts will expire shortly, she notes, so Congress needs to address the issue.

More crisis-related legislation is likely. Employer groups are lobbying for more pension funding relief. While WRERA provided relief to plan sponsors, trade groups want more. It’s unclear if WRERA has provided enough assistance to sponsors, says Brown, and Congress may revisit the issue later in 2009. Ricard says that ERIC continues to lobby for additional relief.