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New Pension Law Highlighted

With President Bush’s signature on August 17, the Pension Protection Act of 2006 was signed into law. The new pension law makes substantial changes to traditional defined benefit plans and defined contribution plans.

The law imposes new funding requirements on defined benefit plans and recognizes the growing importance to most workers of retirement savings through defined contribution or 401(k) plans. A few of the Act’s provisions are highlighted below.

Provisions affecting 401(k) plans are expected to increase retirement savings by encouraging employers to automatically enroll workers in their 401(k) plans. Additionally, the pension law will permit employers to increase gradually the amount that workers save. The Retirement Security Project, a non-profit research organization, estimates that auto-enrollment and auto-increase will increase savings an additional $10 to $15 billion each year when fully in effect.

The law made permanent the tax-advantaged contribution limits for Individual Retirement Accounts (IRAs) of up to $5,000 in 2008 and for 401(k) plans of up to $15,000 in 2006, including catch-up contributions of up to $1,000 each year to an IRA and $5,000 each year to a 401(k) plan. These limits were set to expire in 2010.

Other provisions of interest to defined contribution plan sponsors and participants are:

Look for more articles in Stable Times on how the new pension law will affect the 55.4 million individuals covered by employer-sponsored pensions.

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