Senators Murray and Burr release broad bipartisan retirement policy reform legislative discussion draft

On May 26, 2022, Senator Murray (D-WA) and Senator Burr (R-NC) Chair and Ranking Member (respectively) of the Senate Health, Education, Labor, and Pensions (HELP) Committee released a discussion draft of the Retirement Improvement and Savings Enhancement to Supplement Healthy Investments for the Nest Egg Act (the RISE & SHINE Act).

The HELP Committee proposal is part of a broader project to produce a single Senate bipartisan retirement policy reform proposal which can then be synthesized with the House’s SECURE 2.0 legislation and (conceivably) moved in this Congress, perhaps in a post-election lame duck session.

In what follows, we highlight four proposals included in the RISE & SHINE Act: a proposal to allow a DC plan sponsor to establish a separate “emergency savings account;” the imposition of new disclosure requirements on plans offering “lump sum windows;” a new 401(k) plan “reenrollment” requirement; and a clarification of the projected interest crediting rate rule for cash balance plans using a variable interest crediting rate. We then briefly summarize other key provisions of the proposal.

Emergency savings accounts

The RISE & SHINE Act would allow a defined contribution plan sponsor to establish a “pension-linked emergency savings account.”

General features of an emergency savings account: Participant contributions to the emergency savings account would go in on a “Roth” basis (and participants could be auto-enrolled, at a maximum of 3% of pay). The employer could also make contributions – employer contributions would be includible in participants’ taxable income. The maximum amount that could be held in an emergency savings account would be $2,500.

Account requirements: An emergency savings account could have no minimum balance requirement. Amounts in the account would have to be held in an “interest-bearing deposit account, or in an investment or insurance product designed to preserve principal and provide a reasonable rate of return.” And the account could not be subject to “unreasonable fees, restrictions, expenses, or charges” or any withdrawal fees. Amounts in the account would have to be withdrawable at least once per calendar month, within 1 week of a withdrawal request.

Other features: Participant contributions to an emergency savings account would count as “elective deferrals” for purposes of any 401(k) plan matching contributions and for purposes of Internal Revenue Code nondiscrimination rules (aggregated with contributions to the “linked” DC plan). Amounts in the account would have to be withdrawn before any hardship distribution. Withdrawals from an emergency savings account would be exempt from the 10% early distribution tax. And, on termination of employment, the account balance could be rolled over to a Roth account (e.g., a Roth IRA).

Lump sum window disclosure

Plans offering a “lump sum window” (e.g., a limited-time offer of a lump sum as an alternative to current or future annuity payments) would be required to provide notices to participants and to DOL and the PBGC as follows.

Notice to participants

Not later than 90 days prior to the first day of the window election period, the plan’s administrator would have to provide participants a notice including a description of:

The available benefit options, including: for terminated vested participants, an estimated normal retirement age benefit; any subsidized early retirement or qualified joint and survivor annuity option; the monthly benefit amount of immediate annuity payments and the lump sum amount.

The applicable interest rate and mortality assumptions used to calculate the lump sum and whether additional benefits (e.g., an early retirement subsidy) were included.

For terminated vested participants, the “relative value” (under applicable regulations) of the single life annuity/qualified joint and survivor annuity.

“Whether it would be reasonably likely to replicate the plan’s stream of payments by purchasing a comparable retail annuity using the lump sum.”

Other “potential ramifications” of taking the lump sum, including longevity risks, loss of PBGC protections, loss of protection from creditors and of spousal protections, “and other protections under [EIRSA] that would be lost.”

Applicable tax rules.

The mechanics of accepting/rejecting the offer.

Contact information.

DOL would be required to issue a model notice for this purpose.

Notices to DOL and PBGC:

Two filings would be required to be provided to DOL and PBGC:

Pre-offer notice. Not later than 30 days prior to the first day of the window election period, a notice including: the number of participants eligible for the lump sum offer; the length of the window period; the applicable interest rate and mortality assumptions used to calculate the lump sum and whether additional benefits (e.g., an early retirement subsidy) were included; and a sample of the participant notice.

Post-offer report. Within 90 days of the end window offer period, the plan sponsor would have to submit a report to DOL and PBGC including “the number of participants and beneficiaries who accepted the lump sum offer and such other information as [DOL] may require.”

These two filings with DOL/PBGC would be made publicly available.

401(k) plan reenrollment requirement

The Rise and Shine Act incorporates the Auto Reenroll Act of 2022. Generally (and very briefly), (1) to qualify for the automatic contribution testing safe harbor, (2) to allow certain “permissible withdrawals,” and (3) to qualify for preemption protection against certain state wage withholding laws, plans that take effect in 2025 or after would have to provide, every 3 years, that every employee eligible to make contributions under the plan that was not making contributions would, in effect, be “re-defaulted,” subject to an election to opt out, into the plan at the plan’s auto-enrollment percentage rate.

Clarification of the projected interest crediting rate rule for cash balance plans using a variable interest crediting rate

For market-based cash balance plans (under which interest is credited based on the actual returns on trust assets or on one or more specified outside funds), there is broad consensus that projecting interest based on a current or recent rate of return could produce unreasonable outcomes when applying certain Internal Revenue Code rules, such as for the 133-1/3% anti-backloading rule.  The proposal would provide that for these plans as well as for other cash balance plans that use a variable interest crediting rate (e.g., the rate on 30-year Treasury bonds) “the projected interest crediting rate shall be a reasonable projection of such variable interest crediting rate, not to exceed 6 percent.”

Other provisions

The RISE & SHINE Act would also:

Increase the cap on mandatory distributions from $5,000 to $7,000.

Instruct 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, subject to certain requirements. DOL is also instructed to produce a report “regarding the utilization, effectiveness, and participants’ understanding of the benchmarking requirements under this [new provision].”

Require, with respect to a pooled employer plan, that a fiduciary be designated to collect contributions.

Instruct DOL to review, in consultation with the ERISA Advisory Council, its Interpretive Bulletin on annuity settlements (aka “risk transfers”) and report to Congress its findings, “including an assessment of any risk to participants.”

Instruct DOL, Treasury, and the PBGC, after consultation with “a balanced group of participant and employer representatives,” to (as soon as practicable) (1) recommend ways to “consolidate, simplify, standardize, and improve” reporting and disclosure requirements and (2) “assess the effectiveness of the applicable reporting and disclosure requirements,” including “how participants and beneficiaries are providing preferred contact information, the methods by which plan sponsors and plans are furnishing disclosures, and the rate at which participants and beneficiaries (grouped by key demographics) are receiving, accessing, understanding, and retaining disclosures.”

Allow for simplified annual disclosure for “unenrolled” DC participants.

Provide new rules for the recovery (or non-recovery) and rollover of overpayments.

Reduce the allowable minimum service requirement for “long-term part-time employees” (working more than 500 but less than 1,000 hours per year) from 3 to 2 consecutive years.

Instruct DOL to study fee disclosure regulations and “report to the [HELP Committee] on … beneficial education for consumers on financial literacy concepts as related to retirement plan fees and recommendations for legislative changes needed to address such findings.”

Instruct DOL to allow DC plans to consolidate certain required notices into a single notice under certain circumstances.

Revise the DB plan annual funding notice, changing (in some circumstances) the way plan funding is calculated (e.g., basing the calculation on market interest rates) and adding certain disclosures with respect to PBGC guarantees.

Amend ERISA’s fiduciary rules to allow the payment of “incidental expenses solely for the benefit of the participants and their beneficiaries.’’ A “Findings” provision of the Act identifies expert advice concerning “beneficial plan design feature[s] such as automatic enrollment and reenrollment or automatic escalation” as the sort of “incidental expense” that is the target of this proposal.

Terminate variable-rate premium inflation indexing, freezing it at $48 per $1,000 of unfunded vested benefits.

Extend the period during which certain transfers of DB surplus could be made to fund certain health and life benefits from (currently) December 31, 2025, to (proposed) December 31, 2032.

Political outlook

Some believe that there is a reasonable chance that bipartisan retirement policy reform legislation may pass this Congress, perhaps in a post-election lame duck session.

In furtherance of that project, the RISE & SHINE Act proposal will now go to the Senate Finance Committee, which is considering its own version of bipartisan retirement policy reform.

We expect that Finance and HELP Committees retirement policy legislative priorities will be synthesized into a single Senate bill, perhaps by early Fall. Senate and House staff will then begin an informal conference process, attempting to synthesize the Senate’s bill with the House’s SECURE 2.0 legislation (which the House approved on March 29, 2022, by a nearly unanimous (414-5) vote).

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We will continue to follow these issues.