2015 Year in Preview

Trends, legislation, regulations and litigation will continue to affect the retirement industry in 2015.

The retirement plan industry is an ever-evolving landscape, shaped each year by growing and emerging trends, as well as prior and new legal initiatives.

Tami Simon, managing director of the Knowledge Resource Center at Buck Consultants at Xerox, in Washington, D.C., says retirement plan sponsors are going to continue to focus on spending on their retirement programs, shifting from a shorter-term reactionary point of view to a more strategic perspective. They will look at how their plans fit with the goals of the company and try to restore confidence and a sense of financial well-being for their employees.


Plan sponsors will promote and offer services to help employees manage day-to-day finances, as well as help them understand how to save properly based on their standard of living at different ages, according to Simon. “Employers are stepping up to help employees manage longer-term finances, since employees are not saving enough for retirement,” she says.

Rob Austin, director of retirement research at Aon Hewitt, in Charlotte, North Carolina, says Aon Hewitt is seeing that financial wellness is the No. 1 initiative plan sponsors will take on in 2015. “Saving for retirement is very important, but for some populations, retirement is way down the road and on the back-burner,” he notes. “But, when we talk about how to handle student loans or how to save for different needs, that perks up their ears.”

Debt management, credit score management, credit counseling, budgeting, comparing credit cards, and understanding the difference between stocks and bonds are all financial wellness issues, Austin says. Plan sponsors may provide access to financial planners or other help for employees to create broad financial plans that include things like saving to buy a house or car. He says financial wellness programs should appeal to employees at different life stages.

“Employers are doing this because it’s a benefit. It not only helps employees, but makes them appreciative of the employer,” Austin observes. He says employers can provide financial wellness services on a much bigger scale than individuals may get on their own.

In addition to financial wellness, plan sponsors are looking to do more with their retirement plans beyond providing a match contribution, Austin says. “They are asking, ‘What else can we do that isn’t necessarily putting hard dollar amounts into the plan, but will help participants get to a good retirement income?’”

Employers are focusing on getting money into the plan, optimizing investments and making sure participants are taking assets out of the plan at the appropriate time, according to Austin.

He notes that the use of automation has been going on for almost a decade, but emerging trends include changes in default rates used in automatic enrollment, more plan sponsors pairing automatic enrollment with automatic deferral escalation, and increasing auto-escalation ceilings. More employers also are relaxing eligibility requirements—either by including union, part-time employees or other groups previously excluded, or by eliminating waiting periods for entering the plan. “We used to see only about 50% of plan sponsors allowing for immediate eligibility; now about three-quarters do,” he says.

According to Austin, more plan sponsors are adopting Roth accounts as well, in part because employees are unsure about what taxes will do in future, but also because of legislative proposals for further limiting the amount of pre-tax deferrals by participants. “Some employers are saying, ‘If changes take place in Washington, our plan is primed,’” he says. 


Providing investment help has shifted direction from offering target-date funds (TDFs) in plan investment menus to giving access to online advice, managed accounts and financial planners or advisers, Austin notes. Now, providing help is more the norm than the exception, with more than 50% of plan sponsors offering some kind of help. “I think individuals have made it abundantly known [that] investing is not their strong suit, or they don’t have time to get into it,” he says.

Austin also points out collective investment trusts (CITs) are making a comeback. He says plan sponsors are moving from mutual funds to CITs as a way to lower fees to increase employee outcomes.

“Plan sponsors are asking, ‘What can we do to help individuals translate this big accumulation into sustainable income in retirement?’” Austin says. Aon Hewitt is seeing more interest in drawdown features and in annuities following the Internal Revenue Service (IRS)'s final rules about deferred income annuities in retirement plans.  

Some companies are acting to curb retirement account leakage, Austin says. Plans that allowed for multiple loans now permit only one outstanding loan at a time, he explains, or plan sponsors have added a waiting period to take a loan. Austin says his firm does not see the same efforts being made to limit hardship withdrawals. “Plan sponsors think about a hierarchy of needs; saving for retirement is not more important than having a roof over one’s head or being healthy,” he says. “Plus, there are enough checks and balances with hardship withdrawals, but not with loans.”

Simon adds that plan sponsors are expanding communication channels to reach workers, and social media will come more into play. And, for defined benefit (DB) plans, in 2015, more plan sponsors will conduct asset/liability studies to understand how different economic scenarios can impact their plans, and will examine the pros and cons of plan termination or risk transfer.


On the legislative front, Simon warns that tax reform has the potential to really affect retirement plans. She doesn’t think the proposal put forth by U.S. Representative Dave Camp (R-Michigan) in 2014 will be enacted, but she believes future proposals will borrow from it. “Shifting half of the 402(g) deferral limit to after-tax and freezing deferral limits for 10 years will be big discussion points in Congress,” she predicts.

At the state level, a number of states have moved to use their public retirement systems to offer retirement plans for private-sector workers (see “States Moving to Fill Private-Sector Retirement Plan Void”). According to news reports, Illinois is poised to be the first state to enact legislation to do so, as just last week, the Illinois House approved the state’s Secure Choice plan proposal.


The Department of Labor (DOL) has been working on its re-proposal of a new definition of "fiduciary" since 2011. Now calling it the “conflict-of-interest rule,” the agency still has the re-proposal slated for January 2015 on its most recent regulatory agenda.

Lisa H. Barton, a partner with law firm Morgan, Lewis & Bockius LLP, says she expects the re-proposal to be issued in 2015. She notes there is obviously a lot of industry concern about expanding the definition of fiduciary to include all investment advisers, as this could significantly impact the way retirement advice is given to participants, as well as costs and who is involved. “Probably one of the things that is going to happen if investment advisers are fiduciaries is that services will potentially cost more. Participants may have to pay more for advice they’ve gotten previously because advisers will be taking on more risk,” she says.


Barton says plan sponsors can also expect guidance on self-directed brokerage accounts in 2015: guidance about the fiduciary responsibility for reviewing certain investment options in a self-directed brokerage account, and possible fee or disclosure requirements. In August, the DOL issued a request for information (RFI) about the use of brokerage windows, self-directed brokerage accounts and similar features in 401(k)-type retirement plans. The comment period ended in November. There is no anticipated date for a proposed rule in the DOL’s regulatory agenda.

However, the DOL lists a September 2015 date for a final rule about a guide or similar requirement to help plan sponsors understand service provider fee disclosures. The DOL says the guide would ask covered service providers (CSPs) to provide a “roadmap [to identify] the document and page [number] or other sufficiently specific locator, such as a section, that enables the responsible plan fiduciary to quickly and easily find the [information].” The agency has recently asked for permission to issue a request for information and establish focus groups to get information about the effectiveness of Employee Retirement Income Security Act (ERISA) Section 408(b)(2) service provider fee disclosures. Barton says a final rule would give more guidance about what service providers would need to include with fee disclosures. Specifically, she explains, the DOL has been concerned that because some of the fee disclosure information is provided in multiple documents or complicated formats, plan sponsors and fiduciaries may not be able to adequately understand the fees that are being paid by the plan. Formalizing a guide to reading the fee disclosures will help plan sponsors and fiduciaries understand how to read and interpret the documents being provided.

Barton also thinks plan sponsors can expect more guidance about lifetime income illustrations on benefit statements. The DOL issued an advanced notice of proposed rulemaking in 2013, which Assistant Secretary of Labor Phyllis Borzi, with the DOL’s Employee Benefit Security Administration (EBSA), said is issued when the DOL thinks there is a problem but is not sure if a regulation would be the solution. Barton notes that a lot of providers already have this information on participant benefit statements, but may be using different assumptions for calculating it. She thinks the DOL’s guidance would help to standardize the information and allow the data to be more consistent across the industry.

Although it’s not on the DOL’s latest regulatory agenda, Barton says she understands that the DOL is evaluating the level of disclosure required for target-date funds (TDFs). However, this does not appear to be at the top of the DOL’s priorities, so any guidance or regulation would likely be issued late in 2015 or early 2016.

From the IRS, Barton says there has been talk about providing relief from nondiscrimination requirements for closed defined benefit plans. Legislators have appealed to the Department of Treasury for relief, saying nondiscrimination testing required to qualify a DB plan for tax-deferred status makes it difficult for companies to enact soft freezes on pension plans—even though soft freezes can result in better retirement outcomes for employees than simply closing a pension plan outright. The problem is that, over time, grandfathered employees in the old system typically build seniority and become more highly compensated than younger workers entering into a company’s defined contribution (DC) plan. This widens the income gap between the two groups and inadvertently increases the likelihood that the DB plan will fail to meet nondiscrimination standards.

According to Barton, the IRS and DOL are also considering providing de-risking guidance for companies looking to de-risk pension plans by annuitizing part of benefits with an annuity provider. On October 24, 2014, members of the United State Senate sent a letter to the heads of various government agencies, including the IRS, DOL and Pension Benefit Guaranty Corp. (PBGC) requesting guidance. The letter addressed a number of concerns, including annuitization of pension liabilities and allowing retirees in pay status to elect to receive lump-sum distributions.


Finally, Barton says the IRS is looking at requiring more substantiation for hardship distributions from retirement plans. Currently, plan sponsors, fiduciaries and service providers may vary in what is required to be provided to substantiate hardship distributions, she explains. The concern is that participants may be taking distributions that might not adequately support a hardship distribution. The IRS guidance would likely more clearly explain what is required in order to take a hardship distribution from a defined contribution plan.

The IRS is also expanding pre-approved retirement plan document programs. The deadline for submitting pre-approved 403(b) plan documents is April 30, 2015. However, industry experts agree it will take at least a year for the agency to review them and decide which documents are approved. The IRS has also been preparing to expand its pre-approved defined benefit plan program to include plans with cash balance features.  The agency said it is developing tools, which will be available before June 30, 2015, to assist plan sponsors in drafting these plans.


A number of lawsuits have been filed challenging the“church plan” status of retirement plans offered by health systems. Results of the lawsuits could affect 30 years of legal and regulatory precedents, so their progress will be closely watched in 2015.

As Barton notes, the Supreme Court’s review of the Tibble v. Edison excessive fee case will also be closely followed. A U.S. District Court held that utility company Edison International had breached its duty of prudence by offering retail-class mutual funds as plan investments when identical institutional funds were available at a lower cost. The case involved mutual funds that were added to the 401(k) plan between 1999 and 2007, when the case was filed. The court limited its holding to three mutual funds that had first been offered to plan participants within the six-year limitations period provided under ERISA. The ruling was appealed to the 9th Circuit, but the appeals court upheld the District Court’s decision to limit the plaintiff’s claims to the three mutual funds adopted within the ERISA statute of limitations period. This led to a final appeal attempt from Tibble, endorsed by the U.S. Solicitor General, asking the Supreme Court to weigh in on whether such claims should be time-barred. According to Tibble and counsel, if the limitations period bars claims for funds still offered by the plan, it effectively eliminates the plan sponsor’s duty to monitor and review funds placed on its plan’s investment lineup more than six years ago.

According to Barton, if the Supreme Court decides a statute of limitations does not apply in the case, the court may provide additional information regarding the appropriate process for evaluating and determining plan investments and reasonableness of fees in light of the steps the fiduciaries did or did not take in this case. The impact would be to further provide reasons to formalize the investment review process, because plan sponsors and fiduciaries will not be relieved from their duty to monitor investments, including which asset classes are offered. If the court decides a statute of limitations does apply, it will not change the need for a prudent process, but it is likely these other issues will not be addressed, Barton says.

The effect of the Supreme Court’s decision in Fifth Third Bancorp v. Dudenhoeffer may also be revealed in 2015, Barton adds. “Next year, we will be able to tell whether the absence of a presumption of prudence will increase the number of stock drop cases that are filed,” she says. “Plan sponsors need to review their process for evaluating employer stock in light of the Dudenhoeffer decision.”