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On November 4, 2014 the ERISA Advisory Council (EAC) presented its recommendations on two retirement issues it studied in 2014: Facilitating Lifetime Plan Participation and Outsourcing Employee Benefit Plan Services. In this article we discuss the EAC recommendations on “lifetime plan participation” and how they may play out in regulatory or sponsor initiatives. In a separate article, we discuss EAC recommendations on outsourcing.
The EAC consists of 15 members appointed by the Secretary of Labor, representing labor, employers, the general public, and the fields of insurance, corporate trust, actuarial counseling, investment counseling, investment management, and accounting. Each year it considers and hears testimony on selected issues and then makes recommendations to DOL.
There are (at least) two reasons why the EAC (and DOL) are interested in facilitating lifetime plan participation. First, most believe that, to build up adequate retirement savings in defined contribution plans, participants must begin saving relatively early and continue saving throughout their careers. And, second, many believe that retirement savings ‘do better’ in retirement plans (presumably at least in part because of the lower fees) than in, e.g., IRAs or regular savings or investment accounts. Thus, the EAC focused on ‘leakage’ (distributions during employment through loans and hardship withdrawals and at termination of employment) and how to “increase asset retention within the plan at termination of employment.”
Generally, the EAC found that:
Frequent job changes (up to 10 times in a career) result in “multiple opportunities for plan assets to leave the employer sponsored system.”
The mandated disclosure provided at termination “is principally the tax notice which is overly legalistic and focuses solely on removing money from the plan.”
Plan sponsors are hesitant to provide additional information because of fiduciary/liability concerns.
Sponsors “may be able to increase plan asset retention” by:
Offering more features, such as loan initiation, brokerage and mutual fund windows;
Adopting lifetime income options and stable value funds (stable value funds are generally not available in IRAs);
Allowing participants to consolidate multiple accounts; and
Providing access to financial advice.
Loans and hardship withdrawals have a mixed effect on ‘lifetime participation.’ Other than balances that exist at termination of employment, loans are generally paid back. Withdrawals are not. But both loans and withdrawals “may make willingness to save for retirement more attractive.”
“Much of the foundational technology underpinning the current system was developed in support of the supplementary, ‘opt in’ approach to DC plans. However, it is clear that much of this framework is outdated and serves as a barrier to further enhancements to the system.”
To improve lifetime participation, the EAC recommended:
“[E]ducation and outreach to participants and plan sponsors on the considerations and benefits to participants of retaining assets within the employer-sponsored system ….”
“[M]odel, plain language communications that can be provided to participants at all points of their participation in the plan … to help them decide what to do with retirement assets, particularly at job change and retirement, or other distribution events.”
DOL-provided educational materials for sponsors describing the “plan features that encourage lifetime participation.”
An ‘update’ of DOL’s DC plan annuity selection safe harbor.
DOL information that would encourage sponsors “to consider allowing continuation of loan repayments after separation from employment [and] … loan initiation post-separation in order to prevent leakage.”
Uniform forms facilitating plan to plan transfers.
Fostering “technology standards which simplify the electronic transfer and consolidation of accounts ….”
The recommendations focus primarily on getting terminating participants to leave their retirement savings in their (former) employer’s plan. This has been presented by many as a solution to the ‘leakage’ problem. It’s unclear, however, whether sponsors actually want to retain the assets of terminating participants. And the changes in sponsor practice which the EAC proposes to encourage participants to do this – post-termination loan initiation, brokerage and mutual fund windows, lifetime income options and stable value funds, allowing consolidation of multiple accounts and providing access to financial advice – all come with a cost.
Is there some corresponding benefit that sponsors will get for these innovations? It’s unclear. Many have argued that the reduction in unit costs that results from having more assets will make retaining terminating participants’ assets ‘worth it.’ Some sponsors have initiated programs to encourage retention, but most have not.
As we have discussed in the past (see most recently our article Deferred annuities in target date funds approved by IRS, DOL), most sponsors remain concerned about putting an annuity option inside a DC plan. The current safe harbor is not regarded as particularly 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.
There have been efforts to address this issue – including a 2013 ACLI proposal to, in effect, defer to state regulation – but DOL has not taken them up. With regard to annuities, DOL’s primary focus has been on its (possible) lifetime income disclosure regulation (see our article DOL mulls ‘lifetime income’ illustrations for DC benefit statements).
Many have criticized current DC distribution procedures. In practice, on termination, it is much easier and simpler to either take cash or roll plan assets into an IRA than to do a plan to plan transfer – transferring assets from the old employer’s plan to the new employer’s plan. (In this regard, see our article Recent studies on rollovers identify emerging issues.) Thus far, however, there is no DOL- or IRS-led project to simplify this process.
DOL has become notorious for dragging its feet on the use of technology in plan communications. What it will take to improve the technology around transfers is unclear. The incentives for sponsors, providers and the DOL do not all point in the same direction.
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As de-risking of defined benefit plans increases and as the baby boom begins to retire, the problem of what to do with money exiting the employer plan system becomes more acute. Encouraging participants to leave their money in their employer’s plan, and encouraging sponsors to facilitate retention of terminating participants’ assets, is one solution to that problem. It’s unclear, however, how much employer (or employee) enthusiasm there is for that strategy. More or less the same thing could be said about improving the plan to plan transfer process.
Currently, DOL remains focused on (1) its (possible) lifetime income disclosure regulation and (2) its proposed/withdrawn/soon-to-be-re-proposed re-definition of fiduciary regulation. The latter project is expected to address fiduciary issues in the rollover process. When the EAC presented its recommendations Phyllis Borzi, Assistant Secretary of Labor of the Employee Benefits Security Administration (EBSA), indicated DOL intended to re-propose the fiduciary regulation in January 2015.
We will continue to follow these issues.