Agency owners could benefit from new pension law
Now is the time for independent insurance agency owners to bone up on a new law that makes big changes in employee retirement plans.
The Pension Protection Act of 2006, passed in August, rewrote many of the rules on pensions in an effort to aid owners and employees alike. While some changes won’t kick in for a year or two, others went into effect this month.
The law opens up new opportunities for savings and also holds potential pitfalls.
A major benefit: Business owners and key personnel, who had been limited in their own 401(k) savings, can now sock away more if the company enrolls employees automatically in its plan and contributes a required amount.
Potential pitfalls include new rules that require more communication with employees. Quarterly statements are now required, for example.
For a small business without a designated pension person, staying on top of the new rules can be daunting. “Call your professionals and tell them that you’re ready when they want to talk to you,” said Dallas Salisbury, president and chief executive of the Employee Benefit Research Institute, in Washington. “Say, ‘We know we have to do something, so when you know what it is, tell us.'”
The new law affects both defined-benefit plans – traditional pensions that pay out a fixed sum after retirement – and defined-contribution plans like 401(k)s. The changes to defined-benefit plans mostly involve funding requirements.
Among the most significant changes now in place is automatic enrollment, which lets an employer put all employees into the plan by default.
Auto enrollment has proven popular, according to Jack Stewart, a director in the consulting group at Principal Financial Group. Many who had wanted to use the option in the past were afraid of state laws that guard against garnishing wages. “We’ve seen a fairly good uptick in clients that have gone into auto enrollment already,” said Stewart.
Auto enrollment lets business owners unlock savings for themselves and key personnel when they use it with a set of other practices; these include contributing 3 percent of salary into each employee’s account and increasing the amount by a required percentage each year for several years.
Taken together, the practices trigger a safe harbor in the law that lets owners and key personnel contribute their own maximum contributions, $15,500 for an individual this year, and an additional $5,000 for those over 50.
“In general, the PPA will make establishing a retirement plan more attractive to more small business owners, and because of that, more of the rank and file employees will be covered by, and benefit from, an employer-sponsored retirement plan,” said Ray Shojinaga, president of Flynn, Shojinaga & Associates Inc., an independent actuarial consulting firm in Alameda, Calif.
Congress also weighed in on whether an employer should encourage employees to get professional advice on managing retirement savings. The law encourages advice by saying that a plan sponsor won’t be held responsible for investment losses in the plan.
Company stock in retirement plans is also affected by the law, which requires that employees be told of its presence in a plan, and informed that a heavy concentration can be risky.