Current legislation: Neal Simplification Proposal

February 25, 2018

We begin a brief series on current retirement saving legislation.

This is an election year, and it’s unclear that any retirement policy legislation will move in this Congress. But there are a number retirement policy issues on which there is bipartisan consensus (at a minimum) that something should be done – including, e.g., improving 401(k) safe harbors and increasing contribution incentives/defaults, open multiple employer plans (MEPs) and increasing small employer plan formation.

The perceived need for action on these issues is not going away, it’s building. At some point there will be room for action on them. Hence this review of the key proposals policymakers are considering.

We start with a two-part review of proposals introduced at the end of last year by Congressman Neal (D-MA). In this article we discuss his Retirement Plan Simplification and Enhancement Act of 2017 (we’re going to call this the “Simplification bill”). In our next article we will discuss his Automatic Retirement Plan Act of 2017 (we’re going to call this the “Automatic Plan bill”).

These proposals are particularly important because Congressman Neal is the Ranking Member of the House Ways and Means Committee. If (as some speculate) the Democrats “win the House” in this year’s election, then next year Congressman Neal will likely be Chairman of that committee and in a position to drive consideration of his proposals.

Themes of Congressman Neal’s proposals

The Simplification bill is a revision of his earlier proposals. It would make a number of improvements to current rules, fixing some technical issues (e.g., the benchmark for blended funds) but also making some important substantive changes.

Here are some of the changes that the Simplification bill would make to current law.

Changes to the 401(k) automatic enrollment/automatic escalation rules

The bill would make a number of changes to current rules with respect to 401(k) plan automatic enrollment and automatic escalation (of contributions).

Secure Deferral Arrangement 401(k) safe harbor

The bill would add a new automatic contribution safe harbor for 401(k) plans that are “Secure Deferral Arrangements.” This alternative would be in addition to the current safe harbor for “qualified automatic contribution arrangements.” The following table compares default rates and required nonforfeitable matching contributions for non-highly compensated employees (NHCEs) under the current safe harbor and under Congressman Neal’s proposed alternative.

Current Law (“qualified automatic contribution arrangements”)
Neal proposed alternative (“Secure Deferral Arrangements”)
Default Rate
NHCE Match
Default Rate
NHCE Match
1st (full) year 3% First 1% 100% 1st (full) year 6% First 1% 100%
2nd year 4% 2%-6% 50% 2nd year 7% 2%-6% 50%
3rd year 5% 3rd year 8% 7%-10% 25%
4th year 6% 4th year 9%
5th year 10%

Thus, Congressman Neal’s Secure Deferral Arrangements would require (1) more aggressive defaults and (2) a bigger match, for those NHCEs contributing more than 6%. It’s conceivable, however, that many NHCEs would opt out of contributions at the higher contribution/25% match rates.

Small employer credit for matching contributions

Small employers (100 employees and under) would get a credit for NHCE matching contributions under a Secure Deferral Arrangement of up to 2% of the NHCE’s compensation, limited to the first 5 years of participation. This credit would make Secure Deferral Arrangements more attractive to these employers.

Other automatic enrollment-related changes

The bill would eliminate some caps on the current 401(k) nondiscrimination (ADP) testing safe harbor for “qualified automatic contribution arrangements” and would instruct the Secretary of the Treasury to “simplify and clarify” notice and auto escalation rules. The bill would also allow additional time to correct automatic enrollment and automatic escalation errors, generally 9½ months after the end of the plan year during which the failure occurred.

Require coverage of “long-term part-time employees”

The bill would generally require sponsors of 401(k) plans to cover employees working more than 500 but less than 1,000 hours per year for three consecutive years. The nondiscrimination and Top Heavy rules would, however, generally not apply to these employees, and the rule would generally not cover collectively bargained employees.

Changes to Required Minimum Distribution rules

The bill would:

Increase the required beginning date for required Required Minimum Distributions (RMDs) to age 72 in 2024, age 73 in 2029 and would thereafter adjust the required beginning date for increases in life expectancy.

Eliminate the limit of 25% of the participant’s account on the value of a Qualified Longevity Annuity Contract , and increase the dollar limit to $200,000.

Relax the RMD annuity rules.

Provide relief from RMD rules where a participant’s retirement plan accounts do not exceed $250,000.

Clarification of the treatment of economically targeted investments

The bill would provide that:

A fiduciary shall not fail to satisfy the [general fiduciary requirements of ERISA] solely by reason of taking into account economic, social, and governance factors in connection with an investment or investment strategy, but only if the fiduciary prudently determines the investment is appropriate based solely on economic considerations, including those derived from such factors.

Other changes

The bill would also provide for:

Simplification of reporting and disclosure: The bill instructs DOL, Treasury and the Pension Benefit Guaranty Corporation to (within 18 months) recommend ways to “consolidate, simplify, standardize, and improve” reporting and disclosure requirements. It also instructs DOL and Treasury to consolidate defined contribution plan notices and to simplify model distribution (“402(f)”) notices.

Forfeitures to fund matching contributions: The bill would allow funding employer matching contributions out of account forfeitures.

De minimus financial incentives for participation: The bill would allow a sponsor to pay “de minimus financial incentives” (e.g., a non-plan cash bonus) to participants for contributing to a 401(k) plan.

Use of “blended” benchmarks: The bill instructs DOL to produce regulations allowing benchmarking of funds (e.g., for required participant disclosure) that include multiple asset classes (e.g., balanced funds and target date funds) based on a benchmark that is a blend of different broad-based securities market indices.

Clarification of cash balance plan projected crediting rate: For cash balance plans that provide for a variable interest crediting rate, the bill would define the “projected interest crediting rate” as a “reasonable projection of such variable interest crediting rate, subject to a maximum of 6 percent.”

* * *

Many of these proposals have bipartisan support. It is conceivable that the bill could move “on it’s own” or (as some believe is more likely) that specific proposals in it could be included in other legislation.

We will continue to follow these issues.

October Three Consulting, LLC is a full service actuarial, consulting and technology firm that is a leading force behind the reemergence of defined benefit plans across the country. A primary focus of the consultants at October Three is the design and administration of comprehensive retirement benefits to employees that minimize the financial risks and volatility concerns employers face.

Through effective plan design strategies October Three believes successful financial outcomes are achievable for employers and employees alike. A critical element of those strategies is the ReDB® plan design. The ReDefined Benefit Plan® represents an entirely new, design-based approach to retirement and to the management of both the employer’s and the employee’s financial risk, focusing on maximizing financial efficiency and employee value.

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