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Wednesday, August 16, 2006 - Page updated at 12:00 AM

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Pension changes: What you need to know

DALLAS — The pension bill that President Bush is expected to sign into law Thursday represents the most sweeping changes to the country's pension laws in more than 30 years.

What does it mean to you? Basically, it's another step toward putting more responsibility on you to save for your retirement, rather than government and corporations taking care of you in your old age.

Here are the key changes:

• If you are a low- or middle-income earner, the savers credit is being made permanent. It had been set to expire at the end of this year. It gives qualifying taxpayers a credit — worth up to $2,000 — for contributions to retirement savings plans.

• If you work at a company that offers a 401(k) plan, your employer may automatically enroll you beginning in 2008. That provision of the law is intended to encourage people to save.

"That's a good thing," said Alicia Munnell, director of the Center for Retirement Research at Boston College. "It will make it easier to have automatic enrollment, and it will lead to further participation" in 401(k) plans.

• If your company offers a pension, expect the terms to change. That could mean your company may freeze your plan, thanks to the legislation's tougher funding requirements. Or your pension could be converted to what's known as a cash-balance plan, which has different implications for your retirement.

"The days of the good old mother company taking care of you with a pension as a retiree are gone," says Bill Fleming, managing director in the private-company service group at PricewaterhouseCoopers.

• If you're a retiree receiving a pension, you shouldn't worry. Companies can't cut or revoke pension benefits already earned. But as always, if a company goes into bankruptcy, it can turn the liabilities over to the government, potentially resulting in reduced payments. And, some critics say, the legislation encourages companies to do just that.

The legislation overhauls funding rules that have allowed companies to claim their pensions are financially sound even when they have staggering liabilities.

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The intention is to improve the health of corporate pensions, which have suffered low-investment returns, thanks to the bursting of the stock-market bubble and low interest rates.

However, experts say that the bill also will speed the disappearance of traditional pension plans because companies will find them much more expensive to keep up.

"It's going to probably dampen what remaining employer support there is for defined-benefit plans," said Norman Stein, a law professor at the University of Alabama and an expert in pension law.

Those that keep defined-benefit plans are expected to move toward cash-balance plans. The pension legislation created a legal framework to convert traditional pensions into cash-balance plans.

In a traditional pension plan, workers' pensions are determined by a formula in which years of service are multiplied by average pay in the worker's last few years of employment, and then by a percentage, typically 1 percent to 2 percent.

In such an arrangement, workers earn benefits slowly at first, but the curve gets steeper as tenure grows longer. So those who work many years at a company can earn substantial pensions, while those who work fewer years earn disproportionately less.

In a cash-balance plan, the employer sets up a hypothetical account for each worker. Benefits accrue in a more linear pattern, so short-tenured workers end up with a better pension than they would under a traditional pension plan.

Cash-balance plans tend to favor younger employees because they have more time for their money to compound.

One of the attractions of cash-balance plans is workers can take what they have in their accounts when they leave their jobs. That makes the plans ideal for younger workers, who tend to be more mobile during their careers.

Many of the savings incentives, included in a bill for shoring up traditional pensions, were temporary benefits enacted in 2001 and scheduled to expire in 2011.

One change gradually increases the amount you can contribute to Individual Retirement Arrangements, or IRAs, each year. Without action, the contribution limit would have fallen to $2,000 in 2011.

You now may be able to deposit $4,000 annually into IRA accounts. The contribution limit will rise to $5,000 in 2008 and keep increasing in future years to keep pace with inflation. Contribution limits for workplace 401(k) accounts also will rise.

Congress also preserved special rules that let people age 50 and older make extra contributions to their retirement plans.

The changes also:

• Allow you to deposit part of your tax refunds into a retirement account.

• Allow individuals age 70 and older to make tax-free charitable contributions up to $100,000 from an IRA. The contributions must be made before the end of 2007.

• Make permanent a tax break on income from money saved and invested in Section 529 plans to pay for college expenses.

This report contains information from The Dallas Morning News

and The Associated Press.

Copyright © 2006 The Seattle Times Company

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