For me, the highlights of this year were the Department of Labor’s (DOL)’s electronic participant communications proposal, passage of the Setting Every Community Up for Retirement (SECURE) Act, and the appointment of Eugene Scalia as Secretary of Labor. In what follows, I’ll briefly review what seem to me to be the retirement policy successes and failures of what I thought was a pretty good year.
- Authorization of defined contribution (DC) open multiple employer plans (MEPs);
- The DC annuity fiduciary safe harbor;
- Mandatory lifetime income disclosure;
- Closed group nondiscrimination relief;
- Required coverage of long-term part-time employees;
- The increase in the cap on the automatic escalation of contributions in the 401(k) nondiscrimination testing safe harbor; and
- The increase of the required minimum distribution (RMD) age from 70 1/2 to 72.
Whether the two really big policy innovations on this list—open MEPs and the fiduciary safe harbor—will make a big difference remains to be seen. Much will depend on how retirement plan sponsors and providers respond.
Perhaps now we can tackle, through legislation, some of the tougher problems facing our industry: a federal approach to “covering the uncovered;” a comprehensive solution to the student loan problem and the debt vs. retirement savings challenge more broadly; a solution to the DC payout challenge – how to turn accumulation into lifetime income. And, finally, perhaps we can find a viable and bipartisan solution to the multiemployer plan crisis.
With regard to the latter issue, as part of the year-end spending package, Congress also passed the Bipartisan American Miners Act of 2019, allowing the diversion of (taxpayer funded) “surplus” mine cleanup funds to the 1974 UMWA Pension Plan. Congress also increased the cap on annual cleanup funding (and thus the possible “surplus”) from $490 million to $750 million. The situation with the UMWA plan—and the existence of surplus cleanup funds—is unique, but this new legislation is viewed by most as a somewhat roundabout taxpayer bailout of the UMWA plan, and some suggest that it may point to a more general taxpayer funded solution to the multiemployer plan funding crisis.2. Scalia appointed Secretary of Labor – A. I’m probably being naïve, but I have high hopes that Secretary Scalia will drive the DOL to produce more practical solutions to a number of pressing problems: Can we get a durable parsing of the Employee Retirement Income Security Act (ERISA) fiduciary/environmental, social and governance (ESG) investment/proxy voting issue? Every time the regime changes in Washington we get new and different guidance. (Apparently the DOL is at work on this issue.) Can we get some kind of help from the DOL on fiduciary litigation? If we could only get clarity (with some common sense) on the issues of fees and (see more below) “underperformance,” a lot of this would go away—which would actually improve retirement outcomes. In the same vein, how about clear guidance on missing participants, instead of bragging about “money saved” via the audit process—like that could possibly be an efficient way to improve long run results.
The DOL—and Mr. Scalia—got lucky at year end—Congress solved several issues, including open MEPs, the DC annuity fiduciary safe harbor, and lifetime income disclosure—that the DOL should have itself solved years ago. The DOL floundered on the open MEPs issue—and seems to have been floundering on fiduciary guidance as a follow on to last year’s 5th Circuit decision to vacate the fiduciary rule (which they also floundered on, for several years) and to the SEC’s RegBI.
My dearest wish is the Mr. Scalia can get this agency focused on some practical solutions to things that matter.3. Electronic participant communications proposal – A+. Probably the most important thing the DOL did (in our area) this year was its proposal of a new “notice and access” safe harbor for the use of electronic communications to satisfy required participant disclosures in retirement plans. If its work in 2020 is anything like this, it will be a very good year.
4. IRS – C. The IRS’s solution to the open MEP one bad apple problem was reasonable but is now obsoleted by the SECURE Act. The (long overdue) proposed updating of RMD mortality assumptions was welcome, but it required an executive order to get the IRS to move on it. And with reductions in the Society of Actuaries’ life expectancy assumptions for several years in a row, the IRS’s policy of remaining at least a year behind the SOA’s latest data effectively requires plans to overfund. The agency dragged its feet forever on a solution to the closed group issue—which was created by its own regulation—and it took (broadly supported bipartisan) legislation to solve that problem. Finally, we are still waiting for a more reasonable approach to the cash balance plan liability valuation rules and certain other technical anomalies in the current treatment of cash balance plans.
5. RegBI – B-. The SEC’s Regulation Best Interest (Reg BI) package was, in my humble opinion, a mess. The best thing that can be said is that it could have been much worse. And, having lived with the issue of financial services conflicts of interest since (at least) it was raised by the Clinton Administration DOL, I think it’s fair to say that this is a very difficult set of issues to untangle and (somehow) solve via a set of rules. For our industry, the critical issue will be what guidance the DOL will issue on ERISA fiduciary duties vis-à-vis RegBI. And in that regard, I’m very happy that Secretary Scalia was not required to recuse himself.
6. The courts – C. While in some areas progress is being made, much DC plan policy is now being driven by fear-of-litigation. Which is not a good thing. As noted above, more clarity from the DOL on what the rules are would be immensely helpful. Some courts (notably the 9th Circuit!) have taken a reasonable approach to fee litigation, while others seem to be allowing plaintiffs to move forward on very thin allegations—typically leading to a settlement and a search for the next victim. The 1st Circuit (bizarrely, in my humble opinion) suggested that fiduciaries could insulate themselves against this litigation simply by selecting index funds, and the Solicitor General just submitted a brief to the Supreme Court arguing that there was no need to review that opinion.
In addition, we’ve seen the emergence of a new attack on DC plan fiduciaries based on fund “underperformance”—premised explicitly on a rear-view-mirror analysis of fiduciary fund choices. Most bizarrely, a Georgia federal district court found that plaintiffs could proceed with a claim that the use of a BlackRock target-date fund was imprudent.
To repeat—if we could get more clarity on the rules—a lot of this resource-wasting litigation would go away. Why isn’t that a DOL priority?
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Obviously, there is still much to do. In my next column I’ll take a look at our retirement policy agenda, broadly.
Happy New Year to all!
Michael Barry is president of O3 Plan Advisory Services LLC. He has 40 years’ experience in the benefits field, in law and consulting firms, and blogs regularly http://moneyvstime.com/ about retirement plan and policy issues.This feature is to provide general information only, does not constitute legal or tax advice, and cannot be used or substituted for legal or tax advice. Any opinions of the author do not necessarily reflect the stance of Institutional Shareholder Services or its affiliates.
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