U.S. Chamber of Commerce. November 1, 2007

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1 U.S. Chamber of Commerce November 1, 2007 The Honorable Charles Rangel Chairman House Committee on Ways and Means United States House of Representatives Washington, DC Dear Chairman Range!: On behalf of the U.S. Chamber of Commerce, I would like to thank you for the opportunity to comment on H.R. 3361, the Pension Protection Technical Corrections Act of 2007 (Corrections Act). Chamber members support the reforms to the private pension system made in the Pension Protection Act of 2006 (PPA) and want to ensure that those reforms are effectively and efficiently implemented. The U.S. Chamber of Commerce is the world s largest business federation, representing over three million businesses. More than 96 percent of the Chamber s members are small businesses with 100 or fewer employees, 70 percent of which have 10 or fewer employees. Yet, virtually all of the nation s largest companies are also active members. We are particularly cognizant of the problems of smaller businesses, as well as issues facing the business community at large. Besides representing a cross-section of the American business community in terms of number of employees, the Chamber represents a wide management spectrum by type of business and location. Each major classification of American business -- manufacturing, retailing, services, construction, wholesaling, and finance is represented. Also, the Chamber has substantial membership in all 50 states. Positions on national issues are developed by a cross-section of Chamber members serving on committees, subcommittees, and task forces. More than 1,000 business people participate in this process. The Primary Concern of the Chamber is that the Integrity of the PPA be Maintained. The PPA was the culmination of several years of discussions, negotiations, and delicately balanced compromises. Although the PPA contains provisions that we did not initially support, we understood the necessity of compromise. To undue any one of these compromises now would mean undoing them all. After the time and energy put into the bill including the considerable efforts of the Chairman it would be unfair to re-open the debate on substantive provisions. Therefore, we completely support the Chairman and his colleagues in limiting

2 changes to the PPA to technical corrections that are in keeping with the intent of the provisions as passed. We appreciate the significant effort that has been put into the Corrections Act. In particular, we have encouraged Congress to pass the following provisions and appreciate that they have been included in the Corrections Act. Combined Plan Limit. We appreciate the clarification of the combined plan limit. Without this clarification, contributions to the defined benefit plan would be limited to the greater of 25% of compensation or the minimum required contribution even if employer contributions to the defined contribution plan did not exceed 6%. Thank you for clarifying in the Corrections Act that if employer contributions to the defined contribution plan do not exceed 6% of compensation, the defined benefit plan is not subject to the combined plan limit. The Vesting Requirement for Cash Balance Plans. We applaud the inclusion of this provision. As you are aware, a vesting change usually requires one hour of service after the effective date of a change; however, this requirement was not included in the PPA. Thank you for recognizing that this result was not part of Congress s intent and it would have been an onerous and unjust burden on plan sponsors. Repeal of the Summary Annual Report for Defined Benefit Plans. Thank you for changing the reference in section 503(c)( 1) of the PPA. This change clarifies the intent to repeal the summary annual report requirement for defined benefit plans. Even with the magnitude of this effort, however, we believe that there are additional corrections needed to ensure that the intent of the statue is met. In no measure do we discount the work done thus far rather, we believe these changes will complement the work that has been done. As such, we recommend that the following corrections also be included. Congress Needs to Clarify that Asset Smoothing, Not Asset Averaging, Was Intended. One of the key policy discussions with respect to the PPA was the extent to which smoothing of interest rates and asset values would be permitted. Asset smoothing provides an employer with greater predictability with respect to the value of its pension assets and thus greater predictability with respect to its funding obligations. If an employer s funding obligations were subject to the constant fluctuations of the market, funding obligations would be so unpredictable that business planning would be exceedingly difficult. Since that unpredictability is a key reason for pension plan freezes and terminations, it is essential that asset smoothing be preserved. The PPA preserved a degree of predictability by preserving interest rate and asset smoothing, but the problem is that with respect to asset smoothing, the PPA used the term asset averaging, rather than asset smoothing. The legislative history of the PPA is extremely clear that the use of the term averaging was intended to refer to smoothing. In his floor statement on the PPA, Senator Enzi specifically states that smoothing for

3 both assets and liabilities may be only 24 months in duration. (emphasis added) Consequently, the language of the statute should be changed to reflect this Congressional intent. The Effective Date for the Whipsaw Provisions Should Apply to All Subsequent Distributions. The PPA states that the whipsaw provision applies to distributions made after the effective date of the PPA which is August 17, The Chamber urges Congress to clarify the plain meaning of the statutory language, namely, that the effective date is meant to apply to all distributions made after August 17, 2006, even if the corresponding benefits accrued before such effective date. Without this clarification, the provision will not offer the relief it was intended to and will create greater complications in the determination of benefits. The ERISA Preemption Provision Should Not be Contingent on Satisfying Investment or Notice Requirements. To clarify ERISA s preemptive effective on certain state wage garnishment laws, Section 902 of the PPA includes a preemption provision stating that ERISA will supersede the laws of any state that would directly or indirectly prohibit or restrict the inclusion in any plan of an automatic contribution arrangement. However, the preemption provision includes certain investment and notice requirements. Consequently, it is not clear if the old preemption under 514(a) still applies for automatic enrollment arrangements. A proposed rule on default investments has been issued, but no guidance has been provided for the new notice requirement. Since it is impossible to meet these new undefined requirements, it may be that section 5 14(e) is not yet available to plans. To eliminate this ambiguity, we recommend that this preemption not be contingent on satisfying any investment or notice requirements. This treatment is consistent with the preemption under 514(a) where no conditions are applied to the raising of ERISA preemption. Therefore, we urge Congress to delete subsections (2)(C) and (3)(A) of ERISA section 5 14(e) as passed in the PPA. The 30 Day s Advance Notice Requirement for Notice of Freedom to Divest Employer Securities Should be Amended. Section 507 of the PPA creates a new ERISA section 101(m) that requires that an individual be notified of their right to diversify company stock no later than 30 days before the first date they are eligible to do so for any type of contribution (i.e., elective deferrals and employer contributions). This requirement is impossible to satisfy in many situations particularly where the right to diversify employer securities is immediate in a daily trading environment. For example, this requirement cannot be met if an employment offer is made less than 30 days before an employment start date and the employer offers immediate eligibility to participate in a plan. Also, a plan that permits investment in employer securities or matches in employer securities cannot know with 30 days notice when any non-participating employee will choose to participate in the plan. Therefore, section 507 of the PPA should be amended to provide that in situations in which it is not possible to provide 30 days advance notice, because a plan provides that investments in employer securities may be diversified 1152 CONG REC S8749 (2006). 3

4 immediately, such notice must be provided within 30 days following the initial investment. The Mortality Table in Code Section 415 Should be Linked to the Mortality Table in Code section 417. The PPA changed the applicable interest rate and applicable mortality table required under Code section 4 17(e) beginning in Code section 4 17(e) currently refers to the applicable mortality table as the table based on the prevailing commissioners standard table. Code section 415(b)(2)(E)(v) references the same mortality table as in section 417(e)(3)(ii)(I) by using the exact same language; however, section 415 does not actually reference section 417(e). The mortality table language in section 415(b)(2)(E)(v) was not updated by the PPA. Thus, after the PPA is effective for purposes of Code section 417(e), the mortality table for 415 limit calculations will no longer be linked to the 417(e) mortality table, but will remain based on the commissioner s standard table. We believe this was unintentional and should be corrected. 2 The Effective Date for Single-Employer Funding Reforms Should be Delayed. We would like to reiterate the suggestion to delay the effective date of the funding changes for single-employer defined benefit plans. The effective date of the funding reforms is January 1, Although there is a transition period, the focus of the transition is to ease contribution requirements and financial burdens. Because the transition requires calculations to be made under the new rules, plans will have to undergo substantial modifications to their systems in order to be able to meet the transition requirements. At this time, however, plan sponsors do not have enough guidance because proposed regulations on funding are just being issued. With the required notice and comment period, the regulations will not be final until close to the end of the year at the earliest. Moreover, there are additional regulations needed that have not yet been issued even in proposed form. For example, guidance on the mortality table assumptions for calculating lump sum benefit payments is not expected until the middle of November. This is not enough time for plan sponsors to effectively and efficiently implement these rules. 3 We do not place any blame with the Administration on the contrary, it has done a tremendous job of providing much-needed guidance at an astonishing rate. However, with the many, many regulations that they are tasked with creating, it is impossible for them to all be completed at the same time. Taken out of context, it may seem that a year and a half is enough time for parties to prepare. However, in the context of a 900 page bill requiring hundreds of regulations in addition to other substantial regulatory projects (for example, the final regulations on nonqualified deferred compensation which are over 300 pages long), a year and a half just has not been long enough. We believe that this request fits under the technical corrections because the intent of the effective date in the PPA was to give all parties enough time to prepare for the changes 2 Code section 417(e)(3)(ii)(I). We advocate a delayed effective date for all provisions under section 102 of the PPA and the related changes in other sections that are necessary. 4

5 without being unduly burdened. In his floor statement on the bill, Senator Enzi explained that, The new rules we craft should not be so draconian that they become the cause of more bankruptcies and pension plan terminations. Without the appropriate guidance, plan sponsors cannot accurately determine their obligations for Due to the changes made in the funding rules, pension obligations could be significantly different from previous years. Moreover, if there is a significant increase and it is unexpected, it could cause an untenable burden on plan sponsors and drive some to terminate their plans. This result is a direct contradiction of the stated intent of the funding changes. Consequently, we ask that the effective date for the funding rules for single-employer defined benefit plans be extended for at least a year. Pursuant to this concern, we are fully supportive of legislation introduced by Representatives Pomeroy and Cantor, H.R. 3868, which delays the effective date of the funding rules for one year. 4 Again, we appreciate the work done by the Chairman and his colleagues in passing the PPA and appreciate the Chainnan s continued efforts to ensure that the provisions agreed to in the PPA are fully effectuated in the Corrections Act. We look forward to continuing to work the Chairman and other members of Congress on these important issues. Thank you for your consideration of our concerns. Sincerely, Randel K. Johnson Vice President Labor, Immigration & Employee Benefits OfUJO Aliya Wong Director of Pension Policy Labor, Immigration & Employee Benefits 152 CONG REC S8747 (2006).