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With the election nearing, we thought it would be useful to review the retirement benefits legislative agenda: the issues that, beginning in 2017, the new Administration and the new Congress may consider, if they choose to make retirement policy a priority. We begin with a discussion of the current retirement policy framework. We then discuss a critical defined contribution plan policy challenge: getting enough employees into workplace retirement plans.
Our current retirement benefits/retirement savings system is built around the 401(k) plan, with many employers continuing to maintain some form of DB plan (often a cash balance plan) which may or may not be “frozen” (excluding new entrants (a “soft freeze”) or no longer providing for accruals (a “hard freeze”)).
The consensus (to which there is a dissenting minority view) is that, generally, our current system of workplace DC savings (via payroll deductions) into which employees are defaulted (subject to an opt-out) can, together with Social Security and Medicare, provide an adequate retirement benefit, but that several changes to it are needed to reach that goal.
As we see it, our current DC system presents three fundamental policy challenges: (1) getting adequate contributions into the system; (2) investing those contributions efficiently; and (3) distributing DC benefits in a way that adequately allows for longevity risk (the risk that a participant might outlive her retirement savings).
Issue (1) breaks down into two sub-issues – getting American workers covered by an (automatic enrollment) workplace retirement savings plan. And getting plan participants to make adequate contributions. Issue (2) also breaks down into two sub-issues – getting participants in “participant choice” plans (where participants select investments from a fund menu) to make appropriate asset allocation decisions. And “reducing the cost of investment” aka reducing plan fees. Issue (3) is perhaps the most difficult. Unlike traditional DB plans, which are annuity-based, DC plans are account-based, and policymakers, providers and sponsors have not found it easy to get DC participants to think of their benefit in terms of “retirement income” and to make appropriate decisions on that basis.
For policymakers and many sponsors, the principle challenge presented by the DB system is how to manage what has become a “legacy benefit.” The critical questions for policymakers have been: What is the right minimum contribution policy? What is appropriate Pension Benefit Guaranty Corporation premium policy? And what attitude should regulators take towards sponsors “transferring risk” out of the ERISA DB system (settling their ERISA liability either by paying out lump sums or buying annuities)?
The challenges for sponsors mirror these policymaker concerns: What is the most efficient way to manage and ultimately wind up a legacy liability, given the current regulatory, accounting, market and (perhaps most critically) interest rate environment?
Some sponsors, however, remain committed to traditional DB plans. And some continue to maintain “unfrozen” cash balance plans. While the policy challenges these plans present may not be as critical as, e.g., “what do we do about de-risking?” they are significant.
Finally, we should note that much of the retirement “policy” legislation in recent Congresses – including interest rate stabilization relief and increases in PBGC premiums – has been driven by a need to raise revenues for unrelated spending – typically, transportation bills. In this regard, we note that both Clinton and Trump have advocated increased spending on infrastructure.
In that context, perhaps the biggest 2017 policy question will be: will Congress (and the new Administration) continue this practice of modifying retirement policy simply to finance unrelated spending? Or will policymakers address retirement policy on its own terms? There is of course a third alternative – neglect.
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In the remainder of this article we discuss specific policy proposals with respect to the first sub-issue under DC issue (1): how do we get American workers enrolled in workplace savings plans?
To repeat what we said in our recent article on state plan initiatives (and referencing the Government Accountability Office’s 2015 report on Retirement Security – Federal Action Could Help State Efforts to Expand Private Sector Coverage): roughly half of American workers are not covered by a workplace retirement savings plan. Coverage is lowest amongst lower paid employees and employees working for small employers (under 50 employees). And the consensus view is that smaller employers do not adopt 401(k) plans because they do not want to take on the administrative and fiduciary burdens of maintaining an ERISA plan.
The Obama Administration, since 2009, has advocated a system of workplace “Auto-IRAs” – payroll deduction IRAs – into which employees at employers who do not maintain retirement plans would be defaulted. This proposal is often packaged with proposals expanding the Saver’s Credit (which provides a tax credit to low-income savers) and tax incentives for new plan creation.
A more ambitious solution to this coverage problem was proposed in 2014 by (now retired) Senator Harkin (D-IA). His proposal would create a new type of plan/retirement system – USA Retirement Funds – that would be generally independent of employers and would include a number of features advocated by some retirement policy experts: mandatory coverage (except where there is a qualifying defined benefit or defined contribution plan); automatic enrollment; conservative investment management overseen by “a board of qualified, independent trustees able to represent the interests of employees, retirees, and employers;” risk-sharing amongst a large pool of unrelated employees; limited participant access to savings; and payout in an annuity form.
Generally, these federal-level proposals have been opposed by Republicans. In response, some states, including California, Connecticut, Illinois, Maryland and Oregon, have passed laws intended to establish mandatory payroll deduction IRAs at the state level. The Obama Administration has generally been supportive of these state efforts.
Critical questions for 2017: If the new Administration is Democratic, will it make Auto-IRAs a legislative priority? If Republicans still control at least one house of Congress, will they continue to oppose these proposals? Will sponsors, concerned about the possibility of different, multiple state Auto-IRA regimes, support some sort of federal/national solution (as a “least worst choice”)? Or, will a new Democratic Administration put most of its effort/political capital into supporting state retirement plan efforts? Finally, if the new Administration is Republican, how will it address this coverage issue?
One proposal intended to increase the retirement savings of employees of smaller employers does have significant Republican (and Democratic) support: a proposal to increase the ability of employers to use multiple employer plans – the so-called “Open MEPs” proposal.
Multiple employer plans are, generally, non-union plans for participants of unrelated employers. They are viewed by many as a way to make the qualified plan system generally and DC plans in particular “more accessible” – that is cheaper and easier to administer – to smaller employers. There are (at least) two major regulatory obstacles to using MEPs this way. First, current Department of Labor rules provide that MEPs may only be established where there is a “nexus” between employers (e.g., all the employers in the MEP are in the same industry). And second, current Tax Code regulations apply a “one bad apple” rule to MEPs – a qualification violation that applies only to one employer may disqualify the entire plan.
Bipartisan bills have been introduced in prior Congresses to eliminate these rules and otherwise streamline MEP administration.
The Obama Administration has also proposed “doing something about” multiple employer plans – its 2017 Budget (released in February 2016) included a proposal to “amend ERISA” to eliminate the nexus requirement, provided certain conditions are met. Those conditions include:
The unaffiliated employers eligible to participate … would be employers that had not maintained a qualified plan within the previous three years.
The provider would be required to be a regulated financial institution that agrees in writing to be both a named fiduciary … and the ERISA plan administrator [responsible for] nondiscrimination testing and other duties necessary to maintain the plan as tax-qualified.
[T]he provider would be required to register with [DOL] …, meet applicable bonding requirements, and provide required disclosures.
The plan … provide[s] that an employer would not be subject to unreasonable fees or restrictions if it ceased participation.
Participating employers would retain fiduciary responsibility for (1) selecting and monitoring the MEP provider and (2) investing plan assets, unless that responsibility is delegated, e.g., to the MEP provider.
DOL would be authorized to issue guidance with respect to disclosure, capitalization, and bonding requirements for providers and simplified annual reporting.
Critical question for 2017: The Obama Administration Open MEP proposal is generally more restrictive than the Congressional proposals. Will a new Administration (and a new DOL) be prepared to support open MEPs without the above restrictions?
Finally, the Obama Administration has proposed requiring coverage of part-time employees who work at least 500 hours per year for 3 years. No employer contributions would be required and employers would “receive nondiscrimination testing relief” with respect to these employees. Our sense is that this proposal could find bipartisan support as part of a broader bill addressing retirement savings policy.
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In our next article in this series we will discuss proposals designed to increase how much participants contribute to 401(k) plans and which participants (higher-paid vs. lower-paid) make contributions.