Issues: Defined Contribution: Essential Principles for Defined Contribution Plan Legislation

Congress should pass legislation that fosters a legal and economic framework that encourages employers to establish, maintain and expand defined contribution plans in ways that will enhance employee retirement security. Legislative initiatives should work to increase both the number of employees participating in these plans and the level of benefits the employees or their beneficiaries will ultimately receive from them.

To Accomplish these Goals, Congress Should:

• Make Retirement Savings Opportunities Permanent:
  • It is vital to the retirees of tomorrow that Congress make permanent the retirement savings provisions in Title VI of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) – including catch-up contributions, small business pension incentives, the Saver’s Credit, and expanded IRAs and 401(k)s – be made permanent.
• Encourage Pension Portability:
  • Title VI of EGTRRA removed existing barriers that prevented employees from being able to take their retirement savings with them when they switched jobs, whether through a merger (same desk rule) or when moving between different employment sectors. EGTRRA permanence would allow employees changing jobs in the future to continue to keep their retirement savings intact.
  • Provisions that facilitate transfers of after-tax retirement savings, transfers to Roth IRAs, and transfers by non-spouse beneficiaries will result in greater retirement security savings.
• Encourage Flexible Automated Plan Features:
  • Legislation that promotes automated plan features such as automatic enrollment, automatic contribution increases (over time and upon certain events) and default investments will encourage employers to implement defined contribution plans with these features, thus increasing participation and savings levels.
  • Flexible safe harbors will reduce administrative costs and encourage implementation by smaller and medium-sized employers.
  • All types of employers need certainty that state wage withholding laws will not prohibit or otherwise interfere with automatic enrollment.
  • Legislation that promotes default investments in automated plans should encourage the use of a wider range of investments that promote long-term growth and overall retirement preparedness.
• Provide Rational Rules for Plan Administration:
  • Provisions of EGTRRA that rationalize complex and outmoded administrative rules should be retained, encouraging more employers to establish and maintain plans; and providing for ESOP dividend reinvestment is keeping money in the retirement system.
  • Promotion of voluntary compliance programs protects employees by encouraging rapid correction of errors.
  • Legislation should avoid mandates and provisions that restrict plan design.
  • Legislation should clarify that normal prudence standards apply to the selection of an annuity provided under a defined contribution plan, not the “safest available annuity” standard.
• Encourage Investment Advice:
  • Current law discourages employers from providing or offering advice to participants regarding investment decisions inside the plan. Legislation is needed to remove these barriers to advice.