One phrase that comes up time and again during conversations with plan sponsors, advisers and providers is “lasting regulatory and legislative uncertainty,” and there seems to be little sense that the theme will soon recede.
On a recent webcast hosted by Mercer, four of the firm’s on-staff attorneys outlined the huge amount of uncertainty facing sponsors and advisers. They cited diverse sources such as the Department of Labor (DOL)’s pending fiduciary rule reforms, the ongoing discussion about repealing and replacing the Patient Protection and Affordable Care Act (ACA), the potential for wholesale tax reform and the reversal of overtime compensation rules—to name just a few of the intersecting forces shaping the conversation in Washington.
The list of regulatory and legislative challenges affecting employers and their retirement plan consultants can seem endless, and when linked to the increasingly active Employee Retirement Income Security Act (ERISA) plaintiffs’ bar, the Mercer attorneys agreed, it can seem impossible to reach “a point of comfortability.” One simply has to consider the “repeal and replace” effort that has played out regarding the ACA. Republicans, in the majority on Capitol Hill, have attempted twice now to quickly push through unilateral approaches to health care reform, and while both efforts failed outright, the Mercer attorneys anticipate that the “repeal and replace issue will continue to simmer on the back burner and could boil over again at any time.”
Whatever happens on health care—even if nothing at all—the Mercer attorneys felt comfortable wagering that the future for health savings accounts (HSAs) “is already bright and getting brighter.” There is a recognition that these accounts can help change the health care system to be more cost efficient and more consumer-directed, they argued.
The Mercer attorneys went on to observe that another complicating factor here is that some federal courts have recently ruled that federal agencies are providing too little reasoning and justification for their promulgation of new rules and regulations. Perhaps most notably, the U.S. District Court for the District of Columbia recently ruled in favor of the AARP’s challenge to two regulations promulgated by the U.S. Equal Employment Opportunity Commission (EEOC) related to incentives and employer-sponsored wellness programs.
Crucially, the court determined that: “It is far from clear that it would be possible to restore the status quo ante if the rules were vacated; rather, it may well end up punishing those firms—and employees—who acted in reliance on the rules.” In doing so, the court has not vacated the rules but instead “remanded” them to the EEOC for reform and/or elucidation. It is hard to predict what will happen here, the attorneys agreed, or with any of the other issues mentioned.
Confluence of challenges
Asked to give her own overview of this broad and complicated set of issues, Shelby George, senior vice president of adviser services at Manning and Napier, concurred that there is “a real confluence of issues impacting advisers and their clients—the fate of the fiduciary rule, fee and share class controversy, tax reform, potential repeal or replacement of the Affordable Care Act. All of this is leading to what seems like a permanent state of uncertainty in the field.”
George explained the “other complicating factor in all of this” is that so much of the regulatory change is being driven “from different corners, by different interests.”
“So you have the Department of Labor with its requirements, you have the Internal Revenue Service [IRS] and the SEC [Securities and Exchange Commission], and then you have the plaintiffs’ bar and the private providers, each with its own point of view,” George said. “It is not a simple matter, ensuring compliance, but common sense can take you a long way.”
According to George and the team of Mercer attorneys, at the end of the day it is the “big picture framing” of these discussions that will be most helpful to employers as they try to best serve their participants. “By extension, advisers also have to stay focused on the overall direction and momentum of their marketplace,” she said.
“Against this background, we have got to do a better job as an industry of fighting the incorrect assumptions of plan sponsors—for example, that, as a blanket statement, passive investments will protect you from fiduciary violations,” George continued. “It is simply not true, and the real picture is a lot more subtle and complicated than that. The same goes for many of these regulatory, legislative and judicial issues.”
Concluding on a high note, George also agreed that the future for health savings accounts is bright.
“The health care conversation remains a very important topic for us; it has become evergreen,” George said. “We all have seen the figure that the expected expenditures on health care will eat up the majority of people’s Social Security income over the course of their retirement. For people in the future, it is expected they will need double their projected Social Security benefit to cover health care costs.”
To do their job properly, advisers must be cognizant of the fact that many people are now having to utilize high-deductible health plans.
“This has real implications for the retirement savings picture because, oftentimes, we see folks strapped with large medical out-of-pocket expenses go straight to their 401(k),” George said. “We know that encouraging consumers to open and regularly fund HSA accounts can be an important deterrent in helping people avoid taking out heavily taxed early withdrawals to meet their deductible.”