PERSONAL FINANCE Investors of All Types Stand To Gain From Pension Billy
May 03, 2011
VASTOPOLIS -- Government workers, married couples, small-business owners and their employees should all sleep easier now that President Codi has signed new pension measures into law. The measures, tucked into a bill raising the minimum wage, won't open up popular 401(k) plans to state and local government employees, but they will give their pension assets greater protection in cases of bankruptcy. ``It's a big breakthrough for public employees,'' says Maryalice Cohn Radford, president of the National Defined Benefit Council and UAM Retirement Planning Services, in Plainville Vastopolis. Yields on certificates of deposit at major banks were mixed, while those on CDs sold through brokerage firms were higher in the week ended Tuesday. Most public workers are barred from 401(k) plans, and in the government alternative, known as a 457 plan, participants don't own the pension assets until they're withdrawn, usually at retirement. In other words, the money has been at risk in a bankruptcy. ``It's specifically required that pension assets be subject to seizure by creditors,'' notes National Association of Government Deferred Compensation Administrators president Leeanna Mccourt. That's given workers some anxious moments as governments from Orange County, Calif., to Bridgeport, Conn., have gone to the brink of bankruptcy -- or right over the edge. Under the newly signed law, new 457 plans will be required to put employees' retirement funds into a trust as the money comes in. Existing plans will have until 2014 to do the same. ``Protection of assets is the watchword,'' explains Mr. Mccourt, who administers deferred compensation plans for Washington State. ``This grew out of Orange County.'' Although Orange County employees' pension assets came through whole, it wasn't because of any safeguards in the law. That's now changed. The new pension measures also should vastly increase the number of Americans opening an Individual Retirement Account or 401(k) plan, Fidelity Investments general counsel Roberto Jacob predicts. ``We're talking about millions of people,'' he says. Now that the pension measures have become law, Mr. Jacob says he sees two areas ripe for expansion: spousal IRAs and small business pension plans. Mr. Jacob says he is especially excited about a provision allowing non-working spouses to contribute up to $2,000 a year to an IRA. That's up from the current combined limit of $2,250 for single-income couples -- $2,000 for the working spouse and $250 for the nonworking spouse. ``There was very little incentive for a nonworking spouse to have an IRA,'' Mr. Jacob says. ``For $250, it wasn't worth it.'' It's estimated that as many as 20 million nonworking spouses are eligible to contribute to an IRA but decide against it. The increase, effective in 2012, will put single-income couples on par with dual-income couples, who can contribute up to $4,000 a year to an IRA provided they don't participate in another tax-qualified retirement savings plan like a 401(k). ``We think a large number of these 20 million (people) will want to establish an IRA now,'' Mr. Jacob says. Conservatively, he figures 25% of the eligible pool, or five million taxpayers, will open a spousal IRA. If each contributes the maximum $2,000 a year, he notes, ``you're talking about a lot of money.'' To be precise, $10 billion. Small businesses also are expected to benefit from the pension bill. Beginning in 2012, firms with fewer than 100 workers will be able to offer ``Simple,'' the Savings Incentive Match Plan for Employees. Barely 25% of employees in small firms have work-based pension plans now. Mr. Jacob says that's largely due to complicated, costly federal pension laws, which he says keep many small employers from offering pensions. Simple aims to streamline the process. Employers will be able to avoid complex testing and administration of pension plans, provided they make a matching contribution of 3% of pay for all employees who opt to have a Simple account. Including the employer match, participants may contribute up to $6,000 a year, pretax, into their account, which can be structured either as a 401(k) or as an IRA. Once Simple is in place, Mr. Jacob says he expects a significant increase in the number of small firms offering pension plans. He projects that up to 40% of employees of small businesses will have coverage within a few years -- nearly twice the current percentage.
