OK, all you boomers and GenXers who want to manage your retirement money in sexy plans like a 401(k), rather than having one of those stodgy, old-fashioned predictable pensions.

Congress has just made it easier for your bosses to ditch pension plans so that you can "own" your retirement savings. Now let's see how you do.

 

Before leaving for August recess, the Republican Congress passed the Pension Protection Act of 2006, the most comprehensive such legislation in 30 years, promoted as a way to protect existing pensions, aid new ones, and help workers save and invest for retirement.

But the 907-page bill, which most lawmakers had no time to read before rushing out the door for summer break, will do none of those things. Rather, a large part of the younger generation of workers and those to follow will not have the protection of the kind of "defined benefit" pension plan their parents had, nor can they and their families look forward to that sort of retirement security - unless they are lucky in the stock market for the next 25 years or so.

When we last visited the subject in May, conservative House Republicans were busy writing a pension bill that the nonpartisan Pension Rights Center predicted would "eviscerate" laws protecting and encouraging defined-benefit pension plans. As now passed, with some tempering by the Senate, and signed into law by President George W. Bush, the center said the legislation "contains harmful provisions that allow plans to break pension promises and, rather than strengthen the private pension system, are likely to weaken it."

A question: If you were an employer, which would you choose? The "defined benefit" plan, which guarantees a pension based on salary and years of work, which you're required to fund, with sufficient contributions to build a reserve. Or a "defined contribution" plan, like a 401(k), in which the employee provides the funds (although the employer may contribute) and takes the full responsibility for managing investments. The latter provides no fixed benefit and its value ultimately depends on the performance of financial markets. Pension plans, moreover, are regulated by the feds; 401(k)s are not watched as closely.

It is no wonder then that this pro-business Congress came down on the side of the 401(k) and did only what was necessary to save some existing pensions. What Congress did for traditional pensions, said Alicia Munnell, director of Boston College's Center for Retirement Research, may actually hasten the disappearance of such pensions. CPA Ed Slott, based in Rockville Centre, tells me that's happening even now.

Why? Following a pattern seen with Social Security and Medicare, the Republicans cried "crisis" in the funding for the Pension Benefit Guaranty Corp., which guarantees pensions for employees whose companies go under. But the crisis of underfunding is phony, said Karen Friedman of the Pension Rights Center.

Nevertheless, Congress sharply raised the funding requirements for companies and authorized them to "freeze" pension benefits, or even change their plans.

At this point, only half of American workers own stock, two-thirds of all 401(k) accounts are worth about $5,000, and the median value of retirement plans held by 48 million Americans is only $27,000. Even workers over 50 and close to retirement have nest eggs with a median value of only $55,000.

Among its other provisions, the pension law authorizes employers to automatically enroll their workers in a voluntary 401(k)-type savings plan starting in 2008, deducting contributions that begin at 3 percent. Although many companies will choose to contribute to workers' accounts, an employer does not have to contribute unless it is doing so for higher-paid workers or executives. Indeed, Slott said, a company doesn't even have to offer 401(k)s.

The finance industry says automatic enrollment will increase the percentage of workers in 401(k)s from 66 percent to 90 percent, and help younger workers build retirement savings. The financial Web site Kiplinger.com estimates that an employee who began "maxing out his 401(k) [contributions] at age 40 in 2002 when contribution limits were raised to $15,000, could accumulate more than $1.1million by age 65, assuming an 8 percent annual return."

But this also assumes workers will have that much money to invest and puts investment returns at levels that experts think are unrealistic. The worker better be, or have, a good stock picker. The Kiplinger estimate also assumes the worker will be with the same company for those 25 years and won't need to withdraw funds.

Can the worker be sure the company won't be merged out of existence or go belly up? Can the worker predict the market for 25 or more years? For holders of 401(k)s with worthless stock, there is no help from government.

Munnell noted that, to date, the results of 401(k) plans and the like "are not encouraging." They have not been able to work as the third leg of the retirement stool, which has included (1) Social Security, (2) a pension and (3) savings. Social Security may be a worker's only defined-benefit plan. Most workers cash in their 401(k)s when they change jobs. Social Security, like pensions, is secure because workers can't touch the money until retirement.

Munnell concluded, "Even assuming some improvements in 401(k)s, baby boomers and GenXers will face a rapidly changing retirement income landscape, characterized by declining Social Security replacement rates, uncertain pension income and rising life expectancy. ... Work later in life or during retirement will continue to become more essential to providing a secure retirement."