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House Weighs Hybrid Retirement Plan


A bill introduced in the House of Representatives would permit employers to offer a hybrid defined benefit plan and defined contribution plan with employees receiving a single statement.

The new type of investment vehicle, dubbed a "DB(k)," was introduced by Rep. Rob Andrews (D-N.J.) as part of The Retirement Enhancement Revenue Act of 2004 on Nov. 19. It won't go anywhere this year, acknowledges Stuart Brahs, vice president of government relations for Principal Financial Group of Des Moines, Iowa.

But Brahs, who has been working on this proposal for at least six years, said Principal expects to solicit feedback. Then, it hopes Andrews will reintroduce the proposal in January or February with resulting changes. Brahs expects the proposal, currently contained in H.R. 5397 and H.R. 5398, to be part of a package in the 109th Congress, pushing potential adoption into 2005 or 2006. Enactment requires changes to the federal tax code and Employee Retirement Income Security Act (ERISA).

The DB(k) plan, which Principal and the American Society of Pension Actuaries named this new hybrid, would be especially attractive to growing businesses of up to 500 employees, Brahs said. "They make widgets," Brahs said. "They may or may not have a pension arrangement."

The new plan, according to Principal, would provide employees with a fixed, dependable source of income at retirement as well as a chance to direct their own investments in a 401(k) plan. Meanwhile, it would alleviate concerns small businesses have about offering a defined benefit plan by cutting administrative requirements and costs. So, in a sense, it would offer both employer and employee peace of mind.

In this DB(k), Brahs said, plan administration would be handled by a financial services provider, such as Principal. While there would be two separate pots of money, the employee would get a single statement. Principal currently administers 1,500 defined benefit plans, and would expect the new regulation to enhance that figure.

While defined contribution plans are portable, allowing employees to take them along when they leave a company, not all defined benefit plans are. However, under this new DB(k) proposal, both portions of the plan would be portable.

That's a feature much lauded by David Halseth, a principal with HCM Group, a Boulder, Colo., pension and investment consulting firm. "A huge percentage of employees are not investing their money appropriately," Halseth said. He cites studies that indicate defined benefit plans outperformed defined contribution plans.

Putting investment back into the hands of institutional money managers, but adding the benefit of portability, he said, definitely would be "a positive development.

DB Plans for the People

"Defined benefit plans are very expensive," he added. "There are a lot of regulatory hurdles. That's why you don't see a lot of defined benefit plans below the Fortune 500 level."

Under the proposed bill, employer contributions to the plan would be tax-deductible. Employee contributions would be tax-deferred. Minimum benefit under the defined benefit portion of the plan must be at least 20% of average pay.

The plan proposes to simplify administration and reduce costs by:

* Providing one plan document;

* One IRS filing fee;

* One ERISA audit;

* One form 5500 annual report;

Brahs said that so far, employer concerns about the proposal have focused on the ability of employees to leave a company with their retirement stash after a short period. Right now, he says, the bill calls for a three-year vesting period.

Today, with a 401(k) plan, employees can contribute pre-tax money. Not so with a defined benefit plan, noted Ron Gebhardtsbauer, senior pension fellow for the American Academy of Actuaries of Washington. "This [new plan] would allow that to happen in the future," he said.

Gebhardtsbauer called the DB(k) plan a "win-win." "The employer can do the investing, and maybe do a better job investing, and pass on some of the better investment returns by giving guarantees to employees," he said.

"Right now, if a company wants to set up a traditional defined benefit plan, there are some things they can't do that they could do with a 401(k) plan. A defined benefit plan is a better kind of plan, but the rules just encourage defined contribution plans.

"My hope is that this levels the playing field a little and encourages more employers to set up good traditional defined benefit plans," Gebhardtsbauer said.

Nonetheless, he admitted that a DB(k) could place employers, who would have to guarantee defined benefits, at risk if investments fail to meet expectations. "The employer guarantees the benefit no matter how the assets do," he said. "Employees will have to get out there and say, We want some guarantees.'"

Principal maintains that the simpler administration and reduced costs of the DB(k) should help resolve some of these employer concerns.

Gebhardtsbauer said the proposed DB(k) is a simplification of what his own organization ultimately would like to see. "Somewhere down the road, it would be great if assets on the defined benefit side and [defined contribution] side could be merged," he said. "This enables all the money to be used for all the benefits."