May 19, 2006
As the conference between the House and the Senate on the “Pension Security and Transparency Act of 2005” progresses, the National Retiree Legislative Network (“NRLN”) asks that you keep in mind several core issues of great concern to older workers and retirees. We have communicated these concerns to you and your staff in the past and have appreciated your attention to these matters. Nevertheless, the NRLN remains concerned that the views of older workers and retirees be heard throughout this debate and given proper consideration, as the effect of this conference on them is direct and profound.
Cash Balance Conversions
The NRLN strongly supports the prospective provision in the Senate bill eliminating wearaway for normal and early retirement. It is extremely important that this provision be included in the final bill and that you oppose any provision which would weaken these protections for retirees.
However, the NRLN strongly urges you to oppose any and all efforts to retroactively legalize cash balance conversions. The legal risks associated with the conversion of defined benefit plans to cash balance plans were well-known to employers when they undertook these conversions and yet they were still willing to move forward. As a result, thousands of older worker have suffered the “wearaway” of earned benefits as well as the loss of early retirement benefits – and Congress should not change the law retroactively to protect those companies that acted unfairly and unlawfully.
Section 420 Transfers
We strongly endorse the principle of a 100% funding target. However, since markets are inherently volatile, we continue to believe that an existing surplus should not be drained.
The NRLN is adamantly opposed to the Senate provision (Sec. 1331 of the Senate bill) which modifies Section 420 of the Internal Revenue Code to allow transfer of the plan surplus to IRC Section 401(h) healthcare trusts to the extent that assets of the plan exceed 115% of the plan’s current liability. Sec. 1331 would be extremely harmful to retirees. Currently, plan sponsors can only transfer assets if the plan’s assets exceed 125% of the pension plan’s current liability. This 125% rule created a cushion of protection of 35% (the difference between the cushion required to be left behind after a transfer and the plan’s funding target of 90% of current liability). Reducing the funding cushion to 115% of current liability would reduce the funding corridor to 15% (the difference between the asset cushion and the bill’s funding target of 100% of current liability). A minor recession, lower interest rates, lower stock market values and/or a financially weakened plan sponsor will cause even more risk for plan terminations than recently experienced. A longer maintenance of cost period and promises to restore funding levels to 115% will do little good if the employer’s deteriorating financial situation impairs its ability to fully fund the plan, which could result in more plan terminations or freezes. Moreover, this change would leave non-represented participants vulnerable to unnecessary risks.
Transparency and Disclosure
We appreciate the effort that was made in both bills to provide for transparency and disclosure of plan viability to plan participants. Nonetheless, there are several ways these provisions can be strengthened to further protect plan participants.
First, we believe that the transparency of pension plan activity through the greater availability to plan participants of certain plan documents is essential to the protection of pension assets. Plan administrators should be required to provide, on request, all relevant and updated documents that participants and retirees need to ascertain a fuller picture of the plan’s financial status. In particular, we believe ERISA Section 104 should be modified so as to require disclosure upon request of a participant of certain important documents related to the plan’s financial health, asset allocation, and investment guidelines and proxy voting guidelines.
Second, we strongly urge the inclusion of language that would allow disclosure to plan participants, on request, of plan information disclosed as part of an underfunded plan’s Section 4010 filing to the PBGC. While plan sponsors may have a legitimate interest in protecting proprietary information concerning their business, the effective hiding of the important (but nonproprietary) disclosures concerning the financial situation of the pension plan runs counter to the otherwise admirable purposes of this legislation. The barebones and contingent Section 4010 notice to participants currently required by ERISA is not an adequate substitute for at least making the plan information within the 4010 filing available on request. These filings should be available to plan participants within 30 days of written request in order to give participants the opportunity to review these documents in a timely manner.
The NRLN believes the Senate bill strikes the correct balance. While we applaud the objective of both bills to encourage investment advice for 401(k) plan participants, it is very important to eliminate the inevitable conflicts of interest that would result if, as the House bill permits, the 401(k) plan provider is allowed to advise participants on the choice among investment options that vary in terms of commission and cost. It is most prudent to require that investment advisors have no potential conflicts of interest.
The NRLN wants to take this opportunity to thank you and your staff for all of your hard work on these very complex issues, and hope you will give our concerns your strongest consideration.
A.J. (Jim) Norby
National Retiree Legislative Network