The legislation revises ERISA to grant plan trustees broad
powers to cut retired workers' benefits if they can show that would prolong the
life of the plan. If you weren’t paying close attention to happenings in our
nation’s capital around the holiday season - and who could blame you - this
might have slipped your notice: Important pension reforms were signed into law
that will have dramatic impact on retirement for 10 million Americans.
Buried deep in the $1.1 trillion "Cromnibus"
spending bill signed last month by President Obama, the reforms aim to head off
a looming implosion of multiemployer pension plans - traditional defined
benefit plans jointly funded by groups of employers. The eye-opener is that the
reforms mean possible cuts in benefits for people who are already retired - a
rare move in retirement policy.
If you have clients receiving a defined benefit pension - or
who will in the future - here’s what you should know about this legislation. The
reforms affect retirees and workers in multiemployer pension plans, where
employers pool together into a single pension plan. Typically these plans are
found in industries such as construction, trucking, mining and food retailing.
The legislation doesn’t affect private sector workers in single-employer plans,
workers and retirees in public sector pension plans, or participants in defined
contribution plans.
The reform package was developed and pushed over the past
several years by the National Coordinating Committee for Multiemployer Plans (NCCMP),
a coalition of multiemployer pension plan sponsors and some major unions. Ten
million workers are covered by these plans; 1.5 million of them in the roughly
200 plans identified as being in danger of failing over the next two decades.
Like other private sector pensions, multiemployer plans are
backstopped by insurance provided by the Pension Benefit Guaranty
Corporation (PBGC), a government-sponsored agency funded by premiums paid
by plan sponsors. But the level of PBGC protection behind multiemployer
plans is lower than it is for single-employer pensions. The PBGC reported recently that the deficit in
its multiemployer program rose to $42.2 billion in the fiscal year ending Sept.
30, up from $8.3 billion the previous year. If big plans fail, the entire
multiemployer system would be at risk of collapse. The deterioration pushed
PBGC’s's deficit to a record $61.7 billion, despite improvement in the
financial outlook for the single-employer program.
The new legislation addresses the issue by revising the
Employee Retirement Income Security Act (ERISA) to grant plan trustees broad
powers to cut retired workers' benefits if they can show that would prolong the
life of the plan. The bill also increased PBGC premiums paid by multiemployer
plan sponsors, from $13 to $26 per year per worker.
Critics argue that it sets bad precedent by permitting cuts
in the benefits of current retirees. But supporters say it’s a reasonable
reform given the dire circumstances of some plans - and that beneficiaries will
see smaller reductions than they would under a takeover by the PBGC. The
legislation does prohibit benefit cuts for vested retirees over 80, and limited
protections for retirees over 75 - but that leaves plenty of younger retirees
vulnerable to cuts.
If you have a retired client in a multiemployer plan, the
first task is to get a handle on whether the plan is in the “red zone.” Plan
sponsors are required to send out an annual notice indicating the funding
status of their programs, and red zone plans must send workers a “critical
status alert.” A list of plans on the critical list can be found at the U.S.
Department of Labor’s website. The maximum cuts permitted under the new law are
sizeable; the Pension Rights Center offers a cutback calculator that
can help estimate potential reduction. If you have a younger client participating
in these plans, batten down the hatches - and encourage her to save as much as
possible to guard against the risk of further pension cuts down the road.
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