On April 5, 2022, the House Education and Labor Committee, by a 29-21 party line vote, approved the Democrat-sponsored Protecting America’s Retirement Security Act (PARSA). The bill now goes to the House floor for consideration.
PARSA includes retirement policy proposals on fee disclosure, federal government-provided personal financial education, spousal consent with respect to certain defined contribution plan distributions, and automatic re-enrollment that have broad support within the Democratic caucus. In this article, we review those provisions.
PARSA would require DOL to (within two years) review its current participant fee disclosure regulations to “explore how the content and design of the covered disclosures may be improved to enhance participants’ understanding of fees and expenses as well as the cumulative effect of fees and expenses on retirement savings over time.”
Personal financial education – student debt and retirement savings
PARSA would require the Secretary of Education to (within three years) “create a personal finance education portal on a centralized and publicly available website of the Department of Education” for use by recipients of aid (including college student loans) under the Higher Education Act. The portal would, among other things, include information on “the concept of compound growth as it applies to savings and retirement savings, with information about the different types of retirement savings accounts” and “the interaction between savings and retirement decisions and Federal student loan repayment plans.”
Spousal consent for certain DC plan distributions
Incorporating previous legislation on the issue, PARSA would impose a spousal consent requirement on distributions from DC plans (not currently subject to such a requirement), subject to certain exceptions.
Generally, under the proposal, a DC plan could not make a distribution (e.g., in the form of a lump sum) to a married participant, or designate or change such a participant’s beneficiary, unless: (1) the plan provides the participant an explanation of the rights of the participant and of the participant’s spouse with respect to the distribution; (2) the participant’s spouse consents in writing to the distribution or designation or change of beneficiary; (3) that consent is witnessed by a plan representative or a notary public.
Exceptions to consent rules
No spouse: The consent requirements (other than the information requirement) do not apply where the participant establishes to the satisfaction of the plan administrator that: there is no spouse; the participant has not been married for at least one year; the consent cannot be obtained because the spouse cannot be located (after documented search efforts in accordance with DOL requirements); requiring the participant to seek spousal consent is (for “exceptional reasons”) inappropriate, or such other circumstances prescribed by IRS.
Distributions to which consent requirement does not apply
Consent is not required with respect to:
(1) Required minimum distributions or distributions that may be made without the participant’s consent (e.g., where the benefit is not greater than $5,000).
(2) Distributions in the form of a qualified joint and survivor annuity, a qualified optional survivor annuity, a qualified preretirement survivor annuity, or a series of substantially equal periodic payments for the joint lives or life expectancies of the participant and the spouse.
(3) Where the participant does not elect one of the annuity/periodic payment alternatives in (2) (or the plan does not provide them), a distribution of the participant’s entire benefit with 50 percent of it transferred to an individual retirement plan of the spouse.
(4) Certain trustee-to-trustee rollovers (e.g., where the recipient plan is subject to spousal consent rules or the spouse is the beneficiary under that plan).
Incorporating previous legislation on the issue, PARSA would require a plan to impose a 3-year auto-re-enrollment rule on 401(k) plans in three circumstances –
To qualify for the automatic contribution testing safe harbor: 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 qualified percentage rate (generally at least 3% and increasing annually to 6%).
To allow “permissible withdrawals”: Eligible automatic contribution plans (“under which the participant is treated as having elected to have the employer make [salary reduction] contributions in an amount equal to a uniform percentage of compensation“) may, under the Internal Revenue Code, allow a participant that has been defaulted into the plan to withdraw default contributions within 90 days of the employee’s first contribution. To allow these sorts of withdrawals, plans that take effect in 2025 or after would, every 3 years, have to re-default non-contributing participants into the plan, subject to an election to opt out.
To assert that certain state wage withholding laws are preempted: Some states prohibit wage withholding without affirmative employee consent. ERISA’s preemption provisions include a rule that ERISA supersedes any state law “which would directly or indirectly prohibit or restrict the inclusion in any plan of an automatic contribution arrangement.” For automatic contribution plans that take effect in 2025 or after, this ERISA protection against state withholding laws is available only if, every 3 years, non-contributing participants are re-defaulted into the plan, subject to an election to opt-out.
PARSA has no Republican support, and in the mark-up session, Republican members sought to amend the DC spousal consent and automatic re-enrollment provisions. Those amendments were voted down.
It is unlikely that, in the current political environment, this legislation will move in 2022. But the proposals included in it are likely to resurface in subsequent retirement policy debates.