This week, retirement industry sources testified before the House Subcommittee on Health, Employment, Labor, and Pensions, seeking to move forward proposed retirement plan legislation.
The hearing focused on four bipartisan proposals that would amend the Employee Retirement Income Security Act (ERISA) to better meet the retirement plan needs of employees and employers with businesses large and small. H.R. 4604, the Increasing Access to a Secure Retirement Act of 2017, reduces the compliance uncertainty that companies face by amending ERISA to clarify existing rules that provide a fiduciary safe harbor when selecting an annuity provider. H.R. 4158, the Retirement Plan Modernization Act, increases the automatic cash-out limit for retirement plans from $5,000 to $7,600, and defrays some of the costs of retirement plan administration for small employers. H.R. 854, the Retirement Security for American Workers Act, eliminates two burdensome requirements affecting multiple employer plans: the “common nexus” requirement that prevents adoption of open multiple-employer plans (MEPS), in which unrelated employers may collectively satisfy plan administration requirements, and the “one bad apple” rule that punishes all employers in a plan for the failure of one employer to meet the plan’s requirements. H.R. 4610, the Receiving Electronic Statements to Improve Retiree Earnings Act, authorizes the electronic disclosure of retirement plan information so that plan participants may access their plan information online.
In his testimony, Tim Walsh, senior managing director at TIAA, noted that one of the key characteristics of TIAA’s retirement plans is the ability for individual retirement plan clients to allocate a portion of their retirement savings to a guaranteed annuity product that pays guaranteed interest while employees save for retirement. At retirement, employees have the option, but not the obligation, to seamlessly convert some or all of that balance to a guaranteed income stream that they can never outlive. In part, due to the risk-pooling concept at the center of insurance products like annuities, employees who annuitize assets benefit from competitive guaranteed payment amounts. This contributes to highly successful outcomes for TIAA’s participants, Walsh said, who are able to retire with the comfort of knowing that they will have a stream of income that they, and if so elected, their beneficiaries cannot outlive.
“Ensuring that American retirees can count on not only having sufficient assets, but as importantly, income that is guaranteed to last throughout their retirement is among the most critical issues facing our economy over the next generation as Baby Boomer retirements accelerate,” Walsh contended.
Walsh offered TIAA’s strong support for the Increasing Access to a Secure Retirement Act (H.R. 4604). He noted that one of the primary reasons employers have been reluctant to offer annuities on their plan investment menus is uncertainty about how to adequately satisfy their fiduciary duties in selecting an annuity provider. He said H.R. 4604 takes a significant step in addressing this by establishing clear and objective guidelines that can help plan fiduciaries choose an annuity provider for their plan with the confidence that they have met the guidelines.
The proposal does this by allowing the plan fiduciary to rely on representations that an insurer is licensed to offer guaranteed retirement income contracts and has met certain regulatory requirements under state insurance regulations. “In essence, H.R. 4604 allows fiduciaries to rely on the true experts in evaluating an insurer’s financial strength—the state regulatory bodies. We strongly believe that, as proposed, H.R. 4604 would clear a significant hurdle to the availability of annuity products on employer-provided retirement plan menus,” Walsh said.
Speaking about the Receiving Electronic Statements to Improve Retiree Earnings Act (H.R. 4610), Walsh said encouraging the use of electronic delivery of retirement plan documents is another area where Congress can make changes that would improve retirement security by reducing the cost of retirement savings plans and increasing savers’ access to critical information. Walsh’s full testimony is here.
Krista D’Aloia, vice president and associate general counsel at Fidelity Investments supporting its Workplace Retirement business, testifying on behalf of the American Benefits Council, focused on H.R. 4158, the Retirement Plan Modernization Act, which would increase the cash-out limit to reflect normal cost of living increases.
D’Aloia noted that the bill would not mandate that an employer increase its cash-out threshold, or even have a cash-out rule at all. She said many employers do not have a cash-out rule, although the Council believes most do. “Thus your bill preserves employer choice as to what plan features best serve the needs of their employees. In addition, your bill does not prevent a distribution (when allowed by the plan) if an employee chooses to do so,” she said.
D’Aloia pointed out that in many 401(k) plans, departing employees will often roll their account of any size to an IRA or another employer’s plan, and H.R. 4158 preserves the important protections for these employees, including the right to a direct tax-free rollover to an IRA.
The Retirement Plan Modernization Act would also provide that, going forward, the cash-out limit would be increased at the same time and in the same manner as under section 415(d) of the Internal Revenue Code (which sets limits on contribution and benefits) in multiples of $50. “This is quintessential good governing,” D’Aloia stated. “The cash-out threshold is one of the few dollar figures applicable to retirement plans that is not currently indexed for inflation. Congress would put this issue on auto-pilot, so Congress would not need to act again every 10 to 20 years. For these reasons, we commend your leadership in introducing this common sense legislation and are pleased to lend our strong support.” D’Aloia’s testimony is here.
Legislation improvements and the consideration of RESA
In his testimony, J. Mark Iwry, senior adviser to the secretary and deputy assistant secretary for retirement and health policy at the U.S. Department of Treasury, spoke about the Retirement Security for American Workers Act. “By removing these two barriers to the adoption and use of MEPs, and by seeking to improve the quality of MEP service providers, the bill is intended to make it easier for unaffiliated smaller employers to adopt a plan by joining together to do so. This should provide the opportunity to realize greater efficiencies and economies of scale in investment, plan management, and administration, potentially including lower costs and more attractive plan designs. As a result, smaller employers unprepared to adopt a retirement plan on their own might be encouraged to do so in cooperation with others and with the assistance of a professional administrator that assumes many ERISA and Code compliance responsibilities, he said.
“From a policy standpoint, if the Subcommittee wishes to consider possible improvements to the bill, I would raise several possibilities—but only if adding them to the bill during the legislative process would not have the effect of jeopardizing or unduly delaying potential passage of the Retirement Enhancement and Savings Act of 2018 (RESA) legislation that includes this bill,” Iwry added.
He noted that the bill’s ERISA and Code provisions mirror one another to a considerable extent, and it would be helpful for the legislation to better coordinate and allocate the Labor Department and the Treasury Department’s responsibilities and activities, requiring them to maintain consistency in order that the regulatory arrangements be workable and not unnecessarily burdensome for participants, employers, and providers.
Another potential improvement Iwry mentioned would be language making clear that the open MEPs could include not only multiple IRAs but also multiple unaffiliated self-employed individuals sponsoring qualified plans that might be exempt from ERISA if no employees were covered and that might require the Treasury Department to clarify how the tax qualification rules would apply in such a case.
Additional provisions also might be considered to more carefully target the open MEP provisions to encourage new coverage among small employers that do not sponsor a plan—rather than replacing current plans.
Iwry also suggested issues to consider for H.R. 4610, “Receiving Electronic Statements to Improve Retiree Earnings Act.” His full testimony is here.
Paul Schott Stevens, president and CEO of the Investment Company Institute, focused on proposals that would facilitate the use of so-called “open MEPs” and enhance the effectiveness of retirement plan communications by expanding the use of electronic delivery. “For its part, the Institute has been vocal in its support for policies that would improve access to retirement savings opportunities and make retirement plans more efficient and effective—including permitting open multiple employer plans and greater use of electronic delivery. Reforms like these will build upon the strengths of the current system and recognize the important role that the private marketplace plays in its support,” he said.
“Open MEP” arrangements will reduce administrative and compliance costs and burdens for employers, and ultimately improve the availability of retirement plans to employees of small employers, Stevens pointed out. He also said that allowing plan sponsors to make e-delivery the default method for communicating with participants (but allowing participants to opt for paper), will enhance the effectiveness of ERISA communications, maintain security of information, and produce cost savings for the economy and plans that decide to opt for e-delivery. Stevens’ full testimony is here.
In a letter to committee members, the Insured Retirement Institute (IRI) supported the legislation discussed during the hearing, but also noted that two of these legislative initiatives are included in H.R. 5282, RESA. IRI said it believes the enactment of RESA will help Americans by expanding opportunities to save for retirement; increasing access to lifetime income products; helping savers make more-informed decisions about their finances for retirement; and enhancing features of workplace retirement plans.
A recent study suggests Americans are in support of the bill’s provisions as well.