2015 Retirement Policy Outlook

In this article we review key retirement benefits issues that policymakers will focus on in 2015. We begin with a review of the changes in key Congressional policymaker positions.

Legislation — changes in Congress

The 114th Congress officially opened for business January 6, 2015, bringing a number of changes in key retirement policy positions. At the four Congressional committees with jurisdiction over retirement plan issues, only one chairman retained the job he had in the 113th Congress — John Kline (R-MN) continues as Chairman of the House Education and the Workforce Committee. With the retirement of Congressman George Miller (D-CA), however, there is a new Ranking Member, Bobby Scott (D-VA). Paul Ryan (R-WI) takes over from Dave Camp (R-MI) as Chairman of the Ways and Means Committee; Sander Levin (D-MI) remains the Ranking Member of that committee.

In the Senate, where control has changed from Democrat to Republican, Lamar Alexander (R-TN) is the new Chairman of the Senate Health, Education, Labor and Pensions Committee and, with the retirement of Tom Harkin (D-IA), Patty Murray (D-WA) is the new Ranking Member. Orrin Hatch (R-UT) takes over as Chairman of the Senate Finance Committee; Ron Wyden (D-OR) (Chairman in the 113th Congress) is the Ranking Member.

These changes are significant. Congressman Miller was a long-time critic of the 401(k) system, raising questions about fee practices (he introduced comprehensive bills on this issue in 2008 and 2009) and the overall fairness of that system. Senator Harkin’s criticisms of current retirement policy were, perhaps, less strident than Congressman Miller’s, but he (Senator Harkin) invested a lot of time in the last several years in advocacy of the creation of an alternative system, his US Retirement Funds proposal, which he introduced in a much-heralded bill last year. One big question: will other policymakers step up and take on the positions Miller and Harkin advocated?

In Senate Finance Committee hearings on retirement savings tax policy (most recently in September 2014), then-Chairman Wyden was critical of the current system, saying that “[t]he incentives for savings in the tax code are not getting to the people who need them.” Senator Hatch, on the other hand, was, at that hearing and at speeches delivered later in the year, supportive of the current system.

Perhaps the most significant change is Paul Ryan taking over as Chairman of Ways and Means. As discussed below, tax reform will inevitably involve a review of the current system of retirement savings tax incentives. All tax bills must originate in the House. Thus, Chairman Ryan may be the key policymaker on this issue.

It remains to be seen whether the 114th Congress will be productive or will simply be gridlocked in battles with the Administration. But these changes in personnel are at least likely to bring a change in tone if not actual changes in policy.

Tax reform

Of the big issues on policymakers’ to do lists, the one that would have the biggest impact on retirement plans is tax reform. The broad policy goal of tax reform is to reduce marginal tax rates and pay for that reduction by eliminating tax ‘preferences’ (although some reformers simply want to eliminate the preferences and raise revenues). That goal makes retirement savings tax incentives, by some calculations the second biggest tax preference in the Tax Code, a target of reformers.

We discussed then-Chairman of Ways and Means Camp’s 2014 comprehensive tax reform proposal in our article Congressman Camp’s comprehensive tax reform proposal. Briefly, Congressman Camp would have reduced retirement savings tax incentives by: (1) capping the value of the tax exclusion for defined contribution benefits for higher earners (a similar proposal was also included in the Administration’s budget proposal); and (2) requiring that 401(k) maximizers make a portion of their contribution as a Roth contribution.

Whether tax reform moves in the 114th Congress will depend, most of all, on whether the Administration and the now Republican-controlled Congress are prepared to compromise on this issue. Congressman Camp’s proposal got little support in the 113th Congress. If tax reform begins to get bipartisan support in the 114th Congress, however, some of his proposals with respect to retirement savings tax incentives may be reconsidered.

PBGC premiums

Notwithstanding that, at the end of 2013, PBGC premiums were increased significantly as part of a budget compromise, there remained concern throughout 2014 that Congress might again increase premiums, perhaps as a way of funding unrelated spending (PBGC premiums count as revenues for budget purposes). The argument for increasing premiums was undercut somewhat by PBGC’s 2014 annual report, which showed a 30% reduction in its deficit.

Nevertheless, because of concerns about PBGC’s multiemployer program (the financial condition of which radically worsened in 2014) and the need to find ‘revenues’ that don’t count as ‘taxes,’ another PBGC premium increase in 2015 remains a possibility (even if only a remote one).

The ‘closed group’/frozen DB plan issue

As we discussed in our article IRS provides temporary relief for closed plan nondiscrimination issue, some companies that sponsor ‘closed’ defined benefit plans are running into issues under Tax Code nondiscrimination rules. Briefly (and oversimplifying a lot), when a defined benefit plan is closed to new entrants, the group covered under the plan may become discriminatory over time, because of higher turnover amongst lower paid employees and lower paid employees becoming higher paid employees as they gain seniority.

IRS has provided temporary relief for this problem for 2014 and 2015 for plans that meet certain conditions. At the end of last year there was bipartisan support for more comprehensive relief, but in the end it was not included in year-end CR/Omnibus Spending legislation.

There will be ongoing pressure in 2015 to come up with a solution. If, as seems to be likely, IRS is not willing to grant what sponsors view as adequate relief, we may again see legislation on this issue.

Revenue raisers

The foregoing are the retirement policy issues that may be taken up by the 114th Congress. But in the last several years we have seen Congress use retirement policy primarily to raise revenues for other, non-retirement policy purposes. Thus, DB funding relief was granted in 2012’s Moving Ahead for Progress in the 21st Century Act (MAP-21) and in 2014’s Highway and Transportation Funding Act (HATFA) largely as a way to finance highway spending (reduced contributions = reduced deductions = greater revenues), and PBGC premiums were increased to help finance the 2013 year-end budget deal.

Given all of that prior legislation, it’s unclear whether either of those strategies – a further relaxing of DB funding requirements or another PBGC premium increase – is a realistic possibility as a ‘pay-for’ for, say, another highway bill. Other retirement plan-related revenue raisers that have been discussed include:

The elimination of ‘stretch IRAs.’ The proposals on this issue that have been discussed would affect ‘stretch’ payments (generally, a joint and survivor benefit with a very young beneficiary) under DB plans as well as under IRAs and DC plans. We discuss this issue in our article Senators target ‘stretch’ payouts of retirement benefits for elimination.

The elimination of the deduction for dividends on employer stock.

The expansion of Roth 401(k)s and Roth conversions.

Limiting the maximum amount that may be held by an individual in an IRA or 401(k) to, for instance, $3 million. The Administration’s budget has included a similar proposal, although it applied the combination of IRAs, DC and DB plans.

In the agencies – DOL ‘Conflict of Interest Rule-Investment Advice’ regulation

The most significant agency action in 2015 is likely to be the re-proposal of the Department of Labor’s re-definition of the term ‘fiduciary’ for purposes of ERISA; this project has been renamed the ‘Conflict of Interest Rule-Investment Advice’ regulation. DOL describes it as follows:

This rulemaking would reduce harmful conflicts of interest by amending the regulatory definition of the term “fiduciary” set forth at 29 CFR 2510.3-21(c) to more broadly define as fiduciaries those persons who render investment advice to plans and IRAs for a fee within the meaning of section 3(21) of the Employee Retirement Income Security Act (ERISA) and section 4975(e)(3) of the Internal Revenue Code. The amendment would take into account current practices of investment advisers, and the expectations of plan officials and participants, and IRA owners who receive investment advice, as well as changes that have occurred in the investment marketplace, and in the ways advisers are compensated that frequently subject advisers to harmful conflicts of interest.

This proposal was originally made by DOL in 2010, then withdrawn in 2011 in response to bipartisan criticism.

In its (November 2014) Regulatory Agenda DOL indicated that work on the (revised) proposal was to be completed by January 2015. DOL is, as we understand it, still talking to groups interested in the proposal but is committed to going forward with the project. After DOL finishes with the proposal it must still go to the Office of Management and Budget for review, so the proposal will actually be published, at the earliest, later in the first half of 2015.

As we understand it, the new proposal is likely to broadly expand ‘who is a fiduciary’ under ERISA and then provide exemptions from that broad definition, possibly including something like the ‘seller’s exemption’ that was included in the original proposal. Thus, much of the significance of the new proposal is likely to be in how the exemptions are defined.

Other DOL initiatives

DOL has a number of other important initiatives under consideration, including:

The proposal of new rules requiring that DC benefit statements include disclosure of an estimated lifetime stream of payments based on (1) the participant’s current account balance and (2) the participant’s account balance projected to retirement. Thus far, only an ‘Advance notice of proposed rulemaking’ has been issued on this project; we reviewed that notice in our article DOL mulls ‘lifetime income’ illustrations for DC benefit statements. According to DOL’s regulatory agenda, a proposed rule is to be issued by July 2015.

Finalization of DOL’s proposal that certain service providers required to make fee disclosures to sponsors (under the 2012 ERISA section 408(b)(2) regulation) provide a separate guide or ‘roadmap’ to those disclosures. This proposal is somewhat controversial; industry advocates have questioned whether it is necessary or worth the cost. According to DOL’s regulatory agenda, a final rule is to be issued by September 2015.

In 2008 DOL issued a regulation providing a ‘safe harbor’ for the purchase of annuities by DC plans in certain circumstances. That safe harbor, however, has never been considered very ‘safe,’ – it still requires a thorough and prudent selection process, including a judgment about the capacity of the annuity carrier to pay future annuity commitments. Based on comments received in connection with its and the Department of the Treasury’s 2010 Request for Information on lifetime income options, DOL “is developing proposed amendments to the annuity selection safe harbor primarily focused on the condition in the safe harbor relating to the ability of the annuity provider to make all future payments under the annuity contract.” According to DOL’s regulatory agenda, a proposed rule is to be issued by November 2015.

Three other items on DOL’s regulatory agenda: finalization of the DB plan Annual Funding Notice rule; finalization of the target date fund disclosure rule; and a rulemaking project on brokerage windows.

We caution that, if the past is any guide, many of the dates given by DOL for action in its regulatory agenda are likely to slip.

IRS initiatives

IRS has fewer retirement plan-related regulatory projects. Of greatest concern to sponsors of ‘closed’ plans is relief from the application of the nondiscrimination rules to closed groups in certain circumstances. As discussed above, this issue also has the attention of Congress. Temporary relief on this issue runs out at the end of 2015.

At the same time that it issued final rules on hybrid plans (see our September 2014 article IRS issues final regulations on market rates of return for hybrid plans), IRS proposed transition rules for plans that do not currently comply with the market rate of return requirements under the final rules. Those rules will have to be finalized.

IRS will at some point in the relatively near future (possibly 2016) update the mortality tables to be used for DB plan minimum funding and for calculation of lump sums. This will have a significant effect on DB contribution requirements (increasing them) and de-risking transactions (making them more expensive). We discussed the new Society of Actuaries mortality tables, reflecting significant increases in mortality improvement relative to the current regulatory regime, in our article Society of Actuaries releases updated mortality tables.

Also on IRS’s agenda: finalization of IRS’s 2012 proposal to allow DB plans to simplify the treatment of benefits paid partly as an annuity and partly in a more accelerated form (e.g., a lump sum); and finalization of certain DB minimum funding rules.

Finally we note that, while IRS has not taken any significant action with respect to DB de-risking transactions (other than to, apparently, stop issuing private letter rulings with respect to paying lump sums to current retirees), both DOL and Treasury are focused on this issue. It’s not inconceivable that the Administration will take some sort of action in this area in 2015.

In the courts

Probably the biggest ‘courts’ news in 2014 was the Supreme Court’s decision to hear the plaintiffs’ appeal in Tibble v. Edison International, a 401(k) fee case. While the Court limited consideration to the statute of limitations issue (see our article Tibble appeal to be heard by Supreme Court), it’s conceivable that it will take up broader issues at play in 401(k) fee litigation.

We expect more 401(k) fee decisions in 2015, including (possibly) a new lower court decision in Tussey v. ABB; parts of the original lower court decision in that case were vacated and remanded by the court of appeals in 2014 (see our article Tussey appeal decided by Eighth Circuit). We also expect more stock drop litigation as courts sort out what last year’s Supreme Court decision in Fifth Third means (see our articles Harris v. Amgen decided by Ninth Circuit and Tatum v. RJR Tobacco: Circuit court reverses district, holds for plaintiffs).

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These are among the issues we expect to be following in 2015.