Comments Presented to the Committee on Education & Workforce United States House of Representatives

Hearing on H.R. 2830 “The Pension Protection Act of 2005”

June 15, 2005  

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The American Society of Pension Professionals & Actuaries (ASPPA) appreciates the opportunity to submit our comments to the House Committee on Education and the Workforce on H.R. 2830, The Pension Protection Act of 2005.

ASPPA is a national organization of almost 5,500 retirement plan professionals who provide consulting and administrative services for qualified retirement plans covering millions of American workers. ASPPA members are retirement professionals of all disciplines, including consultants, administrators, actuaries, accountants, and attorneys. Our large and broad-based membership gives it unusual insight into current practical problems with ERISA and qualified retirement plans, with a particular focus on the issues faced by small to medium-sized employers. ASPPA’s membership is diverse, but united by a common dedication to the private retirement plan system.

Small Business Defined Benefit Plans should be Exempt from Proposed New Disclosure

Section 501 of the Pension Protection Act (PPA) of 2005 (H.R. 2830) would require that all defined benefit plans provide participants and the Pension Benefit Guaranty Corporation (PBGC) with an annual funding status notice within 90 days after the end of the plan year (e.g., by March 31 for a calendar year plan). This proposed new notice is based on a similar notice required for multiemployer plans, but which are not required under current law to be provided until 60 days after the due date for the plan annual report (e.g., by December 15 for a calendar year plan). Specifically, the notice would be required to provide:

• A statement as to whether the plan’s funded current liability percentage for the plan year is at least 100 percent;
• A reasonable estimate of the value of plan assets for the plan year, the projected liabilities for the plan as of the end of the plan year taking into account any significant events, and the ratio of such assets to such projected liabilities;

• A summary of the rules governing termination of single-employer plans;
• An explanation of the benefits protected by the PBGC and any limitations on such benefits;
• The ratio as of the end of the plan year of the number of vested participants no longer employed by the plan sponsor to the number of active participants; and
• A statement on the funding policy of the plan and the asset allocation of investments under the plan on a percentage basis as of the end of the plan year.

The apparent purpose of this proposed notice is to give participants and the PBGC rapid information about the funding status of the plan. It is unclear what will be the practical value of such information to participants, particularly in the non-union environment.

While some accelerated information might be helpful to provide an early warning system to protect the PBGC, an exemption from the new proposed notice should be made for plans sponsored by small companies. In fact, the Administration which proposed a similar early-warning disclosure earlier this year did provide for a small business exception.

Small businesses would incur substantial additional administrative costs if they were required to comply with the proposed notice. The notice will require a material amount of actuarial work, which will then, in many cases, have to be duplicated when the annual report (i.e., Form 5500) is prepared in the Summer or Fall (for a calendar-year plan). Also, the proposed new notice is required more than eight months earlier than the current law notice applicable to multiemployer plans. That is a particular hardship on small businesses with limited resources. Finally, the information required in the notice may simply not be available. For example, many small business plans invest in hard-to-value assets (e.g., real estate; limited partnership investments), and it may be several more months before valuations for such assets are completed.

Small business defined benefit plans have historically not been a burden on the PBGC since the owners are generally not covered under the PBGC pension insurance program. A new, early notice requirement for small business defined benefit plans that do not pose a potential risk to the PBGC would unnecessarily increase administrative complexity and costs for practically no benefit.

Recommendation

ASPPA recommends that only plans with more than 500 participants should be required to comply with the proposed new notice requirements. The definition of small business defined benefit plans for purposes of this exemption would be the same as the definition of small business plans used in sections 102 and 112 of the PPA for purposes of permitting a valuation date for funding as of any day during the plan year.

Under the PPA, most plans are required to use a valuation date as of the first day of the plan year for plan funding purposes as well as this notice. Small business defined benefit plans (i.e., plans with 500 or fewer participants) may use any day during the plan year for these purposes (see sections 102 and 112 of the PPA).

In other respects, the PPA recognizes the reduced risk posed by small business defined benefit plans. Sections 102 and 112 of the bill exempt plans with 100 or fewer participants from the quarterly contribution requirements applicable to underfunded plans (see sections 102 and 112 of the PPA).