Two new pieces of legislation hammered out at the end of June give retirement-plan sponsors two new reasons to breathe a sigh of relief.
One, related to 401(k)s, is contained in the Dodd-Frank Wall Street Reform and Consumer Protection Act, the compromise version of financial-reform legislation that is still pending final passage. Previous versions of the legislation could have led to the demise of stable-value funds, a 401(k) mainstay. Those versions contained language that would have considered the “wrap” providers that guarantee the funds’ book values to be swap dealers. (Such funds typically rely on swaps and other derivatives to improve yield and keep costs low.) As such, they then would have been considered co-fiduciaries of any plan they worked for, imposing a legal burden on them far greater than any profits they might see, according to experts.
That move threatened to wipe out at least a third of stable-value fund wrap providers and possibly more, according to David Wray, president of the Profit Sharing Council of America, orphaning some of the estimated one-quarter of 401(k) funds, or about $650 billion, now invested in stable-value options.
Instead of forcing stable-value fund providers into a bind, however, the current version of legislation only requires further study of the funds. Within 15 months of the bill’s passage (likely by October 2011), the Securities and Exchange Commission and the Commodity Futures Trading Commission (in consultation with the Department of Labor, the Treasury Department, and state entities that regulate the issuers of stable-value contracts) must study whether or not stable-value contracts “fall within the definition of a swap” — and, if they do, whether or not the wrap providers that offer the contracts should be exempted from other new regulations with which swap dealers may have to comply.
Until that study is published and further determinations are made, the current bill will not apply to stable-value contracts, the bill promises. And any future legislation will apply only to stable-value contracts inked after it, not retrospectively.
Opponents of the original measure say the provision is good news, and portends a future victory. “It is highly unlikely that the study will come up with results that unwind [such] a popular investment option,” says Wray.
Defined-benefit plan sponsors also have reason to cheer. The Preservation of Access to Care for Medicare Beneficiaries and Pension Relief Act (H.R. 3962), signed into law by President Obama two weeks ago, contains provisions to temporarily allow investment losses to be amortized over longer time periods, mitigating the need for employers to dump cash into the plans to meet funding requirements.
Companies looking for a break on defined-benefit contributions have two options under the new legislation. They can choose investment losses from any two years between 2009 and 2011 (as well as the latter months of 2008, for plans that have anniversary dates in those months) and either stretch out the amortization period from the standard 7 years to 15 years or else take the “2/7″ route, paying interest only on the contributions due for the selected years for 2 years and then beginning the 7-year amortization schedule after that. The 2 years don’t have to be consecutive, but both have to follow the same option.
Not every company will want to choose one of the relief options, since restrictions do apply. “Congress wanted to give relief to sponsors that don’t have the cash to put into the plans, but they never intended this to be used by companies that are well off,” says Sue Breen-Held, a consulting actuary at The Principal Financial Group, which helped lobby for the measures. As a result, companies that pay more than $1 million in salary to any employee in a given year (excluding sales commissions but including stock-option exercise gains), or do widespread stock buybacks or pay “excessive” dividends as defined by the law, will not be eligible for the longer payoff periods. More rules regarding what happens to companies that acquire firms relying on the relief are pending, Breen-Held says.
There are plenty of intricacies built into what’s allowed, including some pro-corporate ones, such as the restrictions not applying to any written binding contract signed before March 1, 2010 (when the provisions were first discussed in Congress), and an exemption for any long-term stock incentives granted after October 28 that have at least a five-year vesting schedule.
The restrictions apply for the first 5 years for companies taking the 15-year amortization schedule, and the first 3 years for those using the 2/7 schedule, making the latter more attractive on two fronts: less cash upfront and a shorter period of limitations. However, companies will want to look carefully at future expected pension contribution requirements, Breen-Held says, “because it does build in a spike” in the third year.
Breen-Held expects the measure to come in handy for not only past shortfalls but also future ones. “We anticipate 2011 being another high-cost year for plans,” she says, as the full brunt of the Pension Protection Act of 2006 kicks in and sponsors are required to keep plans 100% funded. “That’s one of the reasons [we] lobbied to have it included as one of the years.”