As 2018 edges closer to the new year, what can those in the retirement plan industry expect?
More financial wellness efforts
Whereas prior years saw a rise in educational content, from fliers, websites, and applications, 2019 is moving towards action-based wellness, says Chris Whitlow, CEO at Edukate. Think student loan repayment programs, automatic rollover implementation, and consumer-based financial products, he lists.
“Financial wellness has made an evolutionary change from being content to more so taking action,” Whitlow says. “A lot of employers are going to say, ‘now that we understand that employees have financial stress, now that we understand our employees are much different from one another, how can we deliver them the solutions necessary for them to take action?’”
The new year will see employers taking action upon themselves and partnering with carriers who can provide certain financial benefit capabilities for their employees, says Whitlow.
“Employers are starting to recognize that as a single carrier, they do not have all of the financial benefit capabilities to service their employees,” he says. “In order to marry those benefits to the right employees, you have to have some type of digitization and the benefits platform to do that. So, we’re seeing employers really think outside of the box and partner with their local credit union to deliver some type of emergency savings product.”
One of the earliest changes in 2019 to be aware of are student loan repayment options, mentions Drew Carrington, senior vice president, head of Institutional Defined Contribution (DC) at Franklin Templeton Investments. An IRS Private Letter Ruling, requested by a plan sponsor, would allow an eligible worker to make an elective contribution during a payroll period “equal to at least 2% of his or her eligible compensation during the pay period,” then the employer can add a matching contribution on behalf of the worker, “equal to 5% of the employee’s eligible compensation during the pay period.” These matching contributions would be applied during each payroll period, the PLR states.
Carrington adds how the feature can be of interest to younger employees, mainly those who aren’t currently taking advantage of their defined contribution (DC) plan match to participate. Even if employees abstain from participating in the plan, these workers are paying down debt to achieve financial wellness.
“People who were not taking advantage of the [DC plan] match get to participate, and get to be more financially healthy” he argues. “It helps their participation rate, it helps retention, and it improves financial wellness more broadly.”
In fact, he says, allocating dollars to student loans can spearhead future savings—including retirement. Once a participant remunerates their loans, whether all, most, or some, those actions incentivize future savings, and result in better participation and less likelihood to cash out throughout changes in career. It’s an inverse move, similar to how dealing with student loan debt is enough to drive participants away from saving in a DC plan.
“Employers view it as another way to try and improve not only retirement readiness, but this broader, more holistic financial wellness concept,” he explains. “We view the trend towards financial wellness not as competing with [DC plans], but really as improving overall retirement readiness.”
While automatic enrollment and auto-escalation will continue to be widely implemented in 2019, Brigen Winters, principal at Groom Law Group ties the popularity to recent arrangements made in the tax code to nondiscrimination safe harbors. He expects more talk among plan sponsors, retirement plan professionals, and legislators for 2019.
“We are also monitoring and talking with plan sponsor clients about various legislative proposals that would adjust the auto enrollment and escalation rules, including the caps, and related safe harbors,” he says.
Plan sponsors may also see changes to Department of Labor (DOL) guidance on automatic rollovers and auto-portability of retirement plan balances. Instead of participants leaving a prior plan balance to their former employer, setting up an automatic program—where the balance follows the worker—enables higher savings while reducing small balance cash outs, an action regarded as a great source of leakage in the retirement system, says Carrington. Additionally, he mentions how participants garnering large amounts of DC plan savings would refrain from cashing out hefty accounts.
“The likelihood that someone cashes out their plan falls dramatically once their balance goes over $10,000,” he says. “If we can get them to rollover a couple of plans to get their balance to 10 grand, now they’re much less likely to cash out.”
Next: The future of the fiduciary rule
This year, the DOL’s fiduciary rule was vacated by a federal court; however, additional guidance is expected from the DOL in the coming year. Carrington points out the current controversy surrounding an employer’s role in soliciting a rollover. Plan sponsors can expect further clarity on that position from the Securities and Exchange Commission (SEC), he notes. Even as more information on the fiduciary rule will be released in 2019, he doesn’t anticipate many plan design revolutions.
“We see that that’s also going to finish up in 2019. Everybody is going to want to dot all their I’s and cross all their T’s, but I’m not sure if we’re going to see huge changes in plan design as a result of issuing those regulations,” he says.
Plan design and policy changes
Michael Barry, president of October Three (O3) Plan Advisory Services LLC, points out that, while the candidates for the midterm elections were not spouting their views on retirement policy as part of their platforms, the results of the elections may indeed affect retirement policy.
The Bipartisan Budget Act of 2017 (BBA 2017) requires the Joint Select Committee on Solvency of Multiemployer Pension Plans to produce legislation by November 30, 2018.
The list of needed improvements to the current system is getting pretty long, Barry says. They include (in no particular order and leaving out a lot): incentives for small employer plan formation; a more effective 401(k) safe harbor; nondiscrimination “relief” for closed groups; expanding the use of electronic participant communications; lifetime income disclosure; authorization of open multiple employer plans (MEPs); and an improved system for connecting “missing” participants with “missing” benefits. Most of the proposals on these issues have some bipartisan support, he states.
Barry also questions what will happen regarding future tax policy’s effect on retirement plans, fees for DC plans and increasing Pension Benefit Guaranty Corporation (PBGC) premiums.
Winters believes Congress will introduce and implement reform legislation for plan sponsors, if not in the upcoming year, then perhaps in 2020.
“I think it’s certainly possible that Congress will pass and the president will sign bipartisan, comprehensive retirement reform legislation in the near future,” he says. “There is pent-up demand for a retirement bill and a number of bipartisan proposals are in the mix as Congress works to finish up its work during the lame duck session and prepares for the 116th Congress.”