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Q&A: THE NEW PENSION ERA

The “Pension Protection Act,’’ expected to be signed today, puts more responsibility on workers to build nest eggs.

By HELEN HUNTLEY
Published August 16, 2006

The pension bill President Bush is expected to sign today sends yet another wake-up call to America’s workers: If you haven’t saved enough for retirement yet, you’d better get busy.

“The days of the good old mother company taking care of you with a pension as a retiree are gone,” said Bill Fleming, a managing director for PricewaterhouseCoopers.

Labeled the “Pension Protection Act,” the bill contains provisions that will force employers who offer traditional pension plans to improve their funding. However, the new rules are expected to prompt many of them to freeze their plans, accelerating the trend away from traditional plans that offer a monthly benefit.

The result will be even more emphasis on retirement savings plans such as 401(k)s, which make workers responsible for their own financial well-being.

Several of the bill’s provisions are designed to increase savings for retirement and for college. The bill makes permanent many savings tax breaks that were scheduled to expire after 2010.

Here’s a look at what the bill might mean for you:

If your company offers a traditional pension plan:

My company’s plan is underfunded. Will the company have to put more money in the plan?

Yes, but not all at once. Most pension plans have seven years to reach full funding; airlines get either 10 years or 17 years (a special break for Delta and Northwest).

Could I lose my pension benefits?

A company cannot take away benefits you already have earned. However, larger pensions may not be fully insured if a company goes bankrupt and turns its plan over to the Pension Benefit Guaranty Corp.

Why would a company freeze its plan?

Even healthy companies are freezing plans because they consider them too expensive. If no new benefits are being accrued, that means less money that has to be set aside now, making it easier to reach full funding. Companies also dislike new rules that will make their year-to-year funding requirements more volatile.

If your company offers a retirement savings plan, such as a 401(k):

Do I have to sign up?

If you don’t, the company may sign you up automatically. It will be easier for companies to offer automatic enrollment and automatic annual increases in savings. You’ll see a savings deduction from your paycheck unless you ask to have it stopped.

Will anyone help me with my investment choices?

That’s now more likely. Initially most of this advice will come through computer programs, but down the road, your company may bring in independent advisers to help workers.

How much can I save?

You can continue to put up to $15,000 a year into a 401(k), plus an extra $5,000 if you are 50 or older. If your employer has a SIMPLE plan, the limits are $10,000 and $2,500.

Will I have any new options?

Your employer may choose to offer a Roth 401(k), which allows you to save money after-tax that can be withdrawn tax-free in retirement. The rules allowing these plans had been set to expire, making employers reluctant to offer them.

If you have an individual retirement account:

Will I be able to save more?

Yes. You can contribute up to $4,000 a year this year, rising to $5,000 in 2008, plus an extra $1,000 each year if you are 50 or older. And you can even have your tax return deposited directly in your IRA to fund your contribution.

Can I get a tax break for my contribution?

IRA deductions are still allowed if you meet income requirements or don’t have a retirement plan through work. In addition, this bill extends the Saver’s Credit, a tax credit of up to $2,000 for contributions to IRAs or retirement savings plans. Income limits for the deduction and the credit will increase with inflation.

Can I give my IRA to charity?

Yes, if you are 701/2 or older, you contribute no more than $100,000 per year and you do it before the end of next year. The new rules even allow your contribution to count toward your required minimum distribution.

If you have a 529 college savings plan:

Will distributions from the plan still be tax free?

Yes, as long as withdrawals do not exceed qualified education expenses. That benefit, which had been scheduled to expire at the end of 2010, will now be permanent. The Florida Prepaid College Program and the Florida College Investment Plan are 529 plans.

Information from the Associated Press was used in this report. Helen Huntley can be reached at hhuntley@sptimes.com or (727) 893-8230.

[Last modified August 16, 2006, 22:08:16]