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