With the November election in the rearview mirror, it's a good time to scan the retirement landscape. What can plan sponsors and plan participants expect on the regulatory and legislative fronts in the coming year? While I don't claim to have a crystal ball, there are some likely developments on the near-term retirement horizon.
In the wake of the election, the federal government is considering a possible tax increase to reduce the federal budget deficit. Full-scale tax reform could cut or limit specific tax breaks as a way of lowering overall tax rates.
Government sees its top three tax expenditures as:
- Employer-provided health care.
- Retirement plan and IRA exemptions.
- Mortgage interest exemptions.
Several ideas have been proposed to curb the current deductions for plan sponsor and plan participant contributions, including:
- Limiting pretax elective deferrals — scheduled to be $17,500 for 401(k) plans in 2013.
- Capping the compensation limit for pretax contributions.
- Eliminating catch-up contributions.
- Setting an overall cap on itemized deductions.
- Removing the employer tax deduction.
The arguments against reducing retirement savings incentives are twofold. First, the amount of "lost" government revenue from these deductions — an estimated $105 billion for defined contribution (DC) and defined benefit (DB) plans — isn't actually lost because the money is taxed when distributed. Second, eliminating or reducing current incentives for retirement savings may result in employers terminating plans. That will greatly reduce overall retirement savings levels because workplace plans are the primary retirement savings mechanism in the US.
Brian Graff, executive director and chief executive officer of the American Society of Pension Professionals and Actuaries, voices concern about tinkering with tax incentives. "We understand Congress needs to reduce the debt and raise revenue, but raiding the tax incentives for 401(k) plans will put American workers' retirement security at risk. Tens of millions of Americans participate in these retirement plans, and 80% of them earn less than $100,000 per year. This is a battle that American workers simply can't afford to lose."1
One possible compromise is a greater emphasis on Roth-type retirement plans that tax at the time of contribution — the government gets more tax revenue up front, but there's still incentive for people to save for retirement.
The re-election of President Obama has retirement industry experts preparing for further action on the regulatory front. According to Lynn Dudley, senior vice president of the American Benefits Council, it's likely that agencies in general will have freer rein with regulations because it's the president's second administration. As a result, regulations may be more sweeping than during the past four years.2
Here's a brief look at some potential developments on the regulatory front.
Fiduciary definition. The Department of Labor (DOL) first proposed an enhanced fiduciary-duty rule in October 2010, citing the need for federal retirement law to provide greater protection from potentially conflicted advice for 401(k) and IRA investors. The rule was withdrawn in September 2011 after fierce protest from industry and bipartisan members of Congress, who said it was too expansive. A particularly contentious issue was whether extending the definition to include broker-dealer IRA advisors would cause them to flee the market, ultimately creating a lack of access to IRA advice that could hurt small investors. The reproposed DOL fiduciary definition will be issued within the next several months.
Uniform fiduciary standard. Capitol Hill Democrats criticized the DOL earlier this year for not working closely enough with the Securities and Exchange Commission (SEC) on the fiduciary-duty issue. The Dodd-Frank financial reform law gives the SEC authority to set a universal fiduciary-duty standard for investment advisors and broker-dealers who provide personalized investment advice about securities to retail customers.
Speaking to a June 2012 conference of retirement plan managers in Washington, D.C., Assistant Secretary of Labor Phyllis Borzi said the DOL and the SEC will continue to pursue separate fiduciary-duty rules because they are governed by different statutes. "I absolutely will not promise anybody there will be a single fiduciary standard, because that's impossible," Ms. Borzi said. "Compliance with one of the standards won't put you out of compliance with the other standard. It doesn't mean a single standard; it does mean a compatible standard."3
Lifetime income and monthly statements. Plan executives and service providers are closely watching how DOL and Treasury Department officials address ways to get participants to focus on lifetime income needs. Discussions in the industry — and the proposed Lifetime Income Disclosure Act — are focusing on requiring participant statements to show not only the personal retirement savings balance, but also the estimated monthly payment participants could expect to receive after retirement, based on their current account balance. It's unclear at this point whether the DOL will mandate income assumptions on participant statements in proposed guidance, which is expected very shortly.
Fee disclosure. It's too soon to determine if fee disclosures for both plan sponsors and participants have had much effect because they just became effective in 2012. While there hasn't been much push back from plan participants this year, 2013 could be different as employees become more aware of the fees they're paying for their retirement plans. The DOL is believed to be ramping up its enforcement capabilities to make sure companies are doing what they're supposed to do regarding fee disclosure, and that may mean more audits. The DOL issued Field Assistance Bulletin (FAB 2012-02) to supplement fee disclosure regulations for participant-level disclosures.
Other rules. Finalized rules governing target date funds and qualified default investment alternatives could arrive in 2013. Some experts also expect proposed Internal Revenue Service (IRS) regulations concerning longevity/annuity contracts to be finalized next year. In addition, the IRS could issue some guidance to help plan participants understand their rights and obligations when they leave a job and take their retirement funds with them.
We'll likely see an increased enforcement climate from the IRS, as well as from the DOL. Plan sponsors who don't self-audit and correct their plans before the IRS gets involved will face stiff penalties.
Here's a snapshot of the legislative landscape for 2013.
Multiple employer plans. To encourage more retirement savings, we might see proposed legislation broadening eligibility for plan sponsors to participate in multiple employer plans (MEPs), which are single plans for unrelated employers. The DOL issued a recent advisory opinion indicating that employers who join these plans still have to fill out Form 5500 and retain fiduciary responsibilities. There's a possibility, though, that we'll get draft legislation requiring MEPs to act as a single plan for ERISA's tax reporting and fiduciary requirements.
Automatic enrollment IRAs. Bills proposing automatic enrollment IRAs for companies with 10 or more employees that don't already sponsor a qualified retirement plan may be revived. These bills would offer employees the ability to have contributions deducted from their paychecks and deposited into qualified IRAs.
USA Retirement Funds. We may hear more about a different approach to retirement plans proposed by Sen. Tom Harkin (D-IA), chairman of the Senate Committee on Health, Education, Labor and Pensions. Sen. Harkin's concept is a two-pronged effort.
The first part of his proposal would create the Universal, Secure and Adaptable (USA) Retirement Funds, a private pension plan to which workers will have universal access. The USA Retirement Funds, which would be privately run and professionally managed, would function as a supplement to DC plans and aren't intended to replace existing pensions. Each USA Retirement Fund would be overseen by a board of trustees consisting of qualified employees, retirees and employer representatives.
Sen. Harkin's proposal includes these features for USA Retirement Funds:
- Access to the funds for employees through their employers' existing payroll withholding system.
- A monthly lifetime income benefit based on the amount of contributions made by or on the behalf of the participant, plus investment performance over time.
Employers' only obligations would be enrolling workers automatically, ensuring processing of employee contributions and making modest contributions. Low-wage workers would be eligible for refundable retirement savings credits that can be contributed to a USA Retirement Fund.
The second part of Sen. Harkin's proposal would strengthen Social Security through a series of measures, including:
- Phasing out the cap on wages subject to the payroll tax over 10 years.
- Adjusting the way Social Security payments are calculated.
- Changing the cost of living adjustment.4
It's my understanding that this concept is being pushed hard on Capitol Hill and will be discussed at congressional hearings next year.
Retirement Plan Simplification and Enhancement Act of 2012. Other retirement-related legislation we may see shortly is from Rep. Richard Neal (D-MA), who released a summary this year of his upcoming 2013 bill, the Retirement Plan Simplification and Enhancement Act of 2012. Rep. Neal's bill will include measures to:
- Expand coverage and increase retirement savings.
- Encourage small businesses to enter and remain in the employer retirement plan system.
- Promote preservation of income.
- Simplify and clarify qualified retirement plan rules.
Social Security. Social Security remains a controversial target for trimming costs. Democrats are generally reluctant to delay benefits by increasing retirement age or reduce benefits by modifying cost-of-living adjustments. It's possible, though, Democrats would agree to compromise legislation that gradually phases in these types of changes in a package deal to raise revenue by cutting deductions or exemptions.
Democrats historically believe that Social Security taxes should be progressive and applied to a higher amount of compensation to improve the solvency of the system. A bill repealing limits on applying employment taxes on wages in excess of the Social Security taxable wage base would generally garner Democratic support, especially if it mandated applying the tax to earnings up to the taxable wage base ($113,700 in 2013) and then to earnings beyond a higher level, such as $250,000.
It's unlikely a measure supporting the Republican preference for personal savings accounts will be on the congressional landscape in 2013.
Many vitally important issues affecting spending, taxes and retirement are currently under discussion in Washington, D.C. I'll keep you posted as key tax deductions and incentives for retirement savings are targeted for review, as well as on other developments relating to retirement savings in 2013.