Pension law to usher in 401(k) era

Analysts: Fund firms to be big beneficiaries

A sweeping pension law signed by President George W. Bush yesterday will lead to the expansion of individual retirement savings plans like 401(k) accounts, analysts expect, and solidify other popular investment vehicles such as 529 college savings plans.

Analysts also predict the law will open the floodgates for companies to shift workers from traditional pension plans with defined monthly benefits to individual savings plans that may prove less generous for workers, but more predictable for plan sponsors.

``This legislation represents the symbolic end of the corporate defined-benefit era," said Robert C. Pozen, chairman of MFS Investment Management of Boston, who often advises federal officials on savings policy .

MFS and the rest of Boston's large mutual fund industry also stand to receive billions of dollars in new business from the growth of 401(k)s and other retirement accounts they will manage under the law, which Bush called ``the most sweeping reform of America's pension laws in over 30 years" in a signing ceremony yesterday in Washington, D.C.

The new rules will require some companies to sharply increase their contributions to traditional pension plans. In an Aug. 14 research paper, Credit Suisse analyst David Zion estimated that companies in Standard & Poor's 500 index would collectively have to contribute $47 billion to their pension plans if the new rules were in effect this year, versus the $30 billion they are likely to pay under the current rules.

In response to the new rules, companies are likely to freeze these plans or even close them if interest rates rise enough. ``We may be headed toward the accelerated demise of defined benefit pension plans continuing the transfer of risk from corporate America to the workforce," Zion wrote.

Facing the rising costs, more companies are likely to embrace the ``cash balance" plans the bill also encourages, Pozen and others expect. These plans mix features of traditional pensions, in which workers are guaranteed cash payments until they die, and 401(k)s , in which they are responsible for saving for their own retirement. Instead, cash-balance plans provide workers a specified amount of money upon retirement, to which both the employer and the worker contribute over the course of the employee's career.

Upon retirement, the worker usually is given the choice of investing the amount in an annuity, which allows the worker to receive a regular pension-like payment until death, or the full lump sum to spend or invest as the worker chooses. Younger workers often prefer these features; companies like that the plans' future liabilities are easy to predict.

Jan Jacobson, director of retirement policy for the American Benefits Council, which represents employers, said she expects the number of cash-balance accounts and similar hybrid retirement plans could double in coming years from their number in 2004, when there were 1,794 cash balance plans with 10 million participants. By comparison, in 2005 there were 28,769 traditional pension plans with 34.2 million participants.

Jacobson also noted a recent court ruling that a cash-balance plan set up in 1999 by IBM Corp. did not discriminate against older workers will also speed their adoption.

Cash-balance plans still might prove less generous for workers than current pension systems but may be the best workers can expect given the economic pressures many companies face, said Peg McGlinch, legislative director for US Representative Richard E. Neal, the Springfield Democrat who sits on the House Ways & Means committee that helped write the law.

For individual investors and workers, the law also is noteworthy for its tax provisions encouraging them to save more , in effect replacing the guarantees lost under old pension systems.

First, the bill guarantees that gains from so-called ``529 plan" college savings accounts will remain exempt from federal taxes, a provision that had been set to expire in 2010. About 9 million children are enrolled these plans, with assets of $92 billion.

Second, the law raises the tax-free amounts that workers can contribute to Individual Retirement Accounts. Currently workers can contribute up to $15,000 a year to their 401(k) plans, but these limits were scheduled to fall in 2010. The bill locks in continued increases in the maximum amounts. The bill also locks in increases in the amount that be stashed away in IRAs.

Third, the law will make it easier for companies to automatically enroll workers into 401(k) savings plans, rather than the current system that leaves the option with the worker. The measure is aimed at significantly raising the 401(k) plan participation rate among workers from its current level of 66 percent of eligible employees to 92 percent, according to an estimate from the Investment Company Institute, which represents mutual funds.

Major fund companies including Fidelity Investments of Boston and Vanguard Group Inc. of Pennsylvania were major boosters of the provision, which effectively increases their customer base.

They also supported a fourth provision of the law, easing rules that limit how much investment advice mutual fund companies and savings-plan operators can give directly to workers. Previously, such advice was barred because of concerns that it could lead to conflicts of interest for fund companies. Investment industry figures argued that system left workers with too little advice at all.

Ross Kerber can be reached at kerber@globe.com.