Defined Contribution Plans
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Background
As the Baby Boom generation begins to retire, it is increasingly important to ensure the strength of the private retirement plan system. Millions of retired Americans rely on private pensions and employer-sponsored retirement savings as their most important source of income after Social Security. In an era when life expectancy has increased dramatically, it is more important than ever that policymakers foster the growth of employer-sponsored retirement plans.
Defined contribution plans are retirement plans that provide an individual account for each participant and the benefit is based solely upon the amount contributed to the account and any income, expenses, gains and losses attributable to such account. Profit sharing and 401(k) plans are examples of defined contribution plans. There are approximately 674,000 defined contribution plans covering more than 48 million workers.
After six months of conference negotiations, Congress passed the Pension Protection Act of 2006. The Senate passed by the bill by a vote of 93 – 5 on August 3, 2006 and the House passed the bill by a vote of 279 – 131 on July 28, 2006. The president signed the bill into law on August 17, 2006. The Act contains numerous provisions relating to defined contribution plans including automatic enrollment provisions and provisions making the retirement savings section of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) permanent. The Act also includes Enron-related legislation that had been previously introduced, including provisions on diversification of assets, investment advice, and executive compensation.
Deferred Compensation. On October 11, 2004, Congress passed the American Jobs Creation Act of 2004, which adds a new section 409A to the Internal Revenue Code governing the deferral of compensation. This is the first Code provision specifically governing nonqualified deferred compensation plans. The business community lobbied aggressively to narrow as many of these provisions as possible and was successful in changing some of the more onerous provisions. Nevertheless, the Act still implements substantial changes for nonqualified deferred compensation plans. In August of 2005, the Department of Treasury issued its first set of proposed regulations under Code section 409A. In January of 2006, the Chamber submitted comments responding to the proposed regulations and addressing issues relating to the definition of service recipient stock and separation pay, rules on the acceleration of payments, and transition guidance. In December of 2004 and April of 2005, the Chamber submitted previous comments addressing transitional guidance, and clarification on the definitions of deferred compensation, elections, distributions, severance pay, and equity compensation. The Chamber is continuing to work with Treasury, the White House, and Congress to ensure that these regulations will address the many concerns that have arisen under these provisions. The Chamber wants to ensure that these new rules are narrowly-targeted to address only the perceived abuses within deferred and executive compensation arrangements.
Late Trading and Market Timing. In late 2003, scandals in the mutual fund industry made headlines and legislative and regulatory reactions to these scandals could impact defined contribution plans. There are two issues of specific concern to plan sponsors – late trading and market timing. Late trading refers to trading done after the market closes to capitalize on profits or losses resulting from events occurring after the market closing time. Late trading is illegal. Market timing, in the current debate, refers to the practice of trading fund shares rapidly to take advantage of "stale" information (for example, there is usually a lag in updating prices for international markets and junk bond funds). Although market timing is not illegal, many mutual fund companies prohibit this type of trading in their internal policies.
On February 6, 2004, the Chamber submitted comments to the SEC on late trading. The SEC proposal would require that only orders received at a mutual fund company or a clearinghouse by 4 pm receive that day's trading price. In its comments, the Chamber asserted that this 4 pm rule would effectively eliminate same day trading for a substantial number of plan participants because many 401(k) plans use an intermediary before sending trades to the mutual fund company. Thus, the rule would unfairly and unnecessarily disadvantage plan participants.
On May 5, 2004, the Chamber submitted comments jointly with the Profit Sharing/401(k) Council of America to the SEC on market timing. The SEC proposal would require a 2% redemption fee on trades bought and sold within a five day period. The comments state that the proposed rule is premature and that the SEC should instead enforce an effective fair value pricing requirement that would eliminate stale net value prices that permit time zone arbitrage and also recommends that any measures to address market timing should accommodate alternative measures jointly agreed upon by the funds, intermediaries, and sponsors of employer-provided retirement plans.
U.S. Chamber Position
The Chamber believes that the inclusion of the automatic enrollment and EGTRRA permanency provisions in the pension reform bill is a huge victory for the plan sponsor community. The U.S. Chamber is committed to maintaining the viability of the private retirement plan system and encourages Congress to implement rules that will promote the maintenance of and participation in retirement savings programs.
Sources for additional information
American Jobs Creation Act of 2004 (H.R. 4520); Amendments to Rules Governing Pricing of Mutual Fund Shares (Release No. IC-26288; File No. S7-27-03); Mandatory Redemption Fees for Redeemable Fund Securities (Release No. IC-26375A; File No. S7-11-04).
Statement for the Record on "Securing Retirement Coverage for Future Generations", 11.08.07 (PDF)
Comments on H.R. 3361 (Corrections Act), 11.01.07 (PDF)
Plan Fees, Letter for the Record, 10.18.07 (PDF)
Testimony of Harold Jackson to Ways & Means Committee, 10.30.07 (PDF)
Testimony for Record, technical corrections— May 17, 2007 (PDF)
QDRO Regulation, Comments— May 7, 2007 (PDF)
Comments On The Proposed Rule On Default Investment Alternatives Under Participant Directed Individual Account Plans — November 13, 2006 (PDF)
Technical Explanation of H.R. 4 by the Joint Committee on Taxation — August 3, 2006 (PDF)
H.R. 4 - "The Pension Protection Act of 2006" — July 28, 2006 (PDF)
Comments on Proposed Regulations under Code Section 409A — January 3, 2006 (PDF)
Joint EGTRRA Permanency Letter — March 11, 2005
