President Bush is expected to sign HR 4, the Pension Protection Act of 2006. The Act requires companies with underfunded pension plans to become fully funded within seven years. If a plan is "at risk" the employer must make accelerated contributions. Airlines who have a "hard freeze" on their pension plans have up to 17 years to meet funding requirements. Airlines with a "soft freeze" will have 10 years.
Some experts predict that the Act will result in a shift to 401(k)s and other nontraditional plans, where companies pay money up front or not at all. These experts believe that the shift to nontraditional plans will result because the Act measures whether plans are underfunded based in part on the corporate bond rate, which is more unpredictable than the 30 year Treasury rate. See Law Could Speed Flight from Pensions, Experts Say byJoshua Freed, Associated Press, The Plain Dealer, Aug. 5, 2006.
The Act also adds legal certainty to cash balance plans, which have been challenged based on age discrimination. Future, but not retroactive switching to "hybrid" plans, combining traditional pensions and savings accounts, are protected by the Act. Older employees claimed the switch to such plans discriminated against them, because they did not have as much time to accumulate money in the 401(k) accounts. The Act creates a simple age discrimination test.
The Act also increases the disclosures employers must make to employees concerning their pension plans. Also, employers may automatically enroll employees in 401(k) plans.
See Senate Approves Pension Overhaul by Amy Goldstein, The Washington Post, Aug. 4, 2006; Employers to Get Seven Years to Make Pension Plans Solvent , by Associated Press, The Plain Dealer, Aug. 5, 2006; Law Could Speed Flight from Pensions, Experts Say byJoshua Freed, Associated Press, The Plain Dealer, Aug. 5, 2006; Senate Passes Bill Shoring Up Pensions by Jim Abrams, Associated Press, The Plain Dealer, Aug. 4, 2006; "House and Senate Pass Pension Protection Act", RIA Pension and Benefits Week Newsletter, Aug. 7, 2006 (Provides a more detailed look at the changes for single employer vs. multiemployer plans.)