Washington Insights - Summer 2018

June 14, 2018 | By Jon Vogler

Jon Vogler
Senior Analyst,
Retirement Research,
Invesco Consulting

Retirement reform bills take center stage at congressional hearing

The House Education and the Workforce’s Subcommittee on Health, Education, Labor and Pensions heard testimony on May 16 about four bipartisan bills that would simplify and modernize retirement plan access and administration.

The four bills discussed were:

  • The Retirement Security for American Workers Act (H.R. 854), which would (1) allow unrelated employers to offer open multiple employer plans (MEPs) and (2) generally eliminate the “one bad apple” rule.
  • The Retirement Plan Modernization Act (H.R. 4158), which would raise the automatic cash-out limit from $5,000 to $7,600 and index it for inflation.
  • The Receiving Electronic Statements to Improve Retiree Earnings Act (H.R. 4610), which would authorize the electronic delivery of retirement plan documents.
  • The Increasing Access to a Secure Retirement Act (H.R. 4604), which would modify the rules that provide a fiduciary safe harbor when selecting an annuity provider.

In this edition of Washington Insights, we will review the intent of these bills (as well as pertinent testimony) and offer an overview of their likelihood of passage. In addition, we will examine a separate bill known as the Federal Retirement Commission Act, recently introduced in the Senate. This bill would establish a federal commission to review private retirement benefit programs and report to Congress on how to improve private retirement security in the United States.

Open MEPs

The Retirement Security for American Workers Act, introduced in the House by Rep. Buchanan, R-FL, would allow small employers to pool workers into open MEPs. The bill would eliminate the requirement under existing regulations that participating employers must share a common “nexus” or relationship (e.g. by being members of a single trade organization). It is intended to promote wider adoption of 401(k) plans among small employers.

Mark Iwry of the Brookings Institute testified that the group purchasing power and economies-of-scale afforded to plan sponsors by open MEPs would help tremendously.

The bill would also dispense with the Treasury Department’s “one bad apple rule,” which could disqualify all assets in a MEP based on one participating employer’s actions, resulting in tax exposure to all participants in the entire plan.

Increasing automatic cash-out limit for plan sponsors

The Retirement Plan Modernization Act, introduced in the House by Rep. Walberg, R-MI, would increase from $5,000 to $7,600 the amount of accrued benefits in a plan that may be immediately distributed without the consent of the participant. Under current regulations, employers can cash out accounts under $5,000 at the termination of employment. If an employer does not have a participant’s rollover instructions, sponsors can move the money into an IRA that only invests in low-return instruments designed to protect principal.

Krista D’Aloia of Fidelity Investments, who testified on behalf of the American Benefits Council, offered support for the updated limit, contending it would improve the efficiency and administration of retirement plans. “On one hand, we want employers to offer employees the right to delay distribution of benefits until retirement. But holding those benefits and accounts – in some cases for many decades – is costly. And these costs are often borne by the employees left behind, particularly in a 401(k) plan.”

She noted that the cash-out threshold is one of the few dollar figures applicable to retirement plans that is not currently indexed for inflation. D’Aloia also explained that the bill would not mandate that an employer increase its cash-out threshold and would also preserve important employee protections, including the right to a direct tax-free rollover to an IRA.

Mr. Iwry suggested that the subcommittee consider addressing the broader challenges of leakage and dwindling IRA balances by looking to improve portability options and helping to consolidate benefits into a single vehicle.

Electronic delivery of plan documents

The Receiving Electronic Statements to Improve Retiree Earnings Act, introduced in the House by Rep. Polis, D-CO, would provide that pension plan documents required to be furnished to a plan participant may be furnished in electronic form if certain requirements are met while establishing consumer protections for participants who would prefer paper documents.

Paul Schott Stevens of the Investment Company Institute testified that making electronic delivery the default method would enhance the effectiveness of communications under the Employee Retirement Income Security Act of 1974 (ERISA), maintain security of information and produce significant cost savings for retirement investors.

While acknowledging that there is a great deal of merit to electronic communications, Mr. Iwry added that he’s not fully convinced the legislation as currently drafted has adequate consumer protections in place. He also raised questions as to how savings from electronic documents would be reallocated to plans.

Annuity selection safe harbor

The Increasing Access to a Secure Retirement Act of 2017, co-sponsored in the House by Rep. Walberg, R-MI, and Rep. Rochester, D-DE, would allow plan sponsors to rely on state insurance regulators to determine the long-term viability of insurance companies when selecting annuities in 401(k) plans. Tim Walsh of TIAA testified that only 5% of 401(k) plans offer annuities, largely because an existing Department of Labor safe harbor requires plan fiduciaries to determine the long-term solvency of annuity providers. Many employers view the current guidance as unclear and unworkable, and Mr. Walsh believes the legislation will give employers the support they are seeking.

Wider adoption of annuities in 401(k) plans would give participants economies of scale in the annuity market and potentially lead to an increase in lifetime income solutions for retirees.

“We need more lifetime income in our system,” said Mr. Iwry, who noted that under the proposed legislation, plan sponsors would still have fiduciary obligations to prudently select and monitor annuity products.

Overview of the bills

Subcommittee members’ comments about the above bills were generally favorable, with many urging a quick markup of all four by the full Committee. Subcommittee Chairman Walberg said that retirement savings is a topic on which Congress can find bipartisan, commonsense solutions if both sides of the aisle work together. He added that the issues addressed during the hearing need to move forward, and he believes there is a good chance that they will.

Bill introduced to create retirement benefit commission

Senators Young, R-IN, and Booker, D-NJ, are the sponsors of the bipartisan Federal Retirement Commission Act. The commission would have a mandate to design ways to improve private sector retirement security. According to Mr. Young, “Our bill would enact a commission to better understand how we can strengthen private benefit programs and ensure our current and future generations have the tools necessary to plan for retirement.”

The bill follows up on a 2017 report from the Government Accountability Office calling for Congress to establish an independent commission to “ ... comprehensively examine the US retirement system and make recommendations to clarify key policy goals for the system and improve how the nation promotes retirement security.”

The proposed commission would include the US Secretaries of Labor, Treasury and Commerce, two presidential appointees, six appointees from the US Senate and six from the US House of Representatives. The commission would be charged with:

  • A review of private benefit programs in the US, with a particular focus on moving from defined benefit to defined contribution models.
  • A review of private retirement coverage, individual and household account balances, investment trends, costs and net returns, and retention and distribution during retirement.
  • A review of societal trends, including wage growth, economic growth, unique small business challenges, serial employment, gig economy, health care costs, life expectancy and shrinking household size that could lead future generations to be less financially secure in retirement compared to previous generations.
  • An exploration of retirement policies to emulate from other countries, such as the mandatory retirement savings systems of Australia and several Scandinavian nations.
  • Submitting to Congress recommendations on how to improve or replace existing private retirement programs upon the affirmative vote of at least three-quarters of the members of the commission.

Source: BenefitsPRO, “4 retirement reform bills you need to know about,” Nick Thornton, May 16, 2018
Source: NAPA Net, “MEPs, e-delivery focus of Hill hearing,” Ted Godbout, May 17, 2018
Source: NewsDash, “Bill introduced to create retirement benefit commission,” Rebecca Moore, May 30, 2018

The opinions expressed are those of the author, are based on current market conditions and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals.

This is not intended to be tax advice. The information presented is based on current interpretation of federal tax law. State income tax laws may differ. Please consult your tax advisor for detailed information. Invesco representatives are not tax advisors.

Invesco does not provide tax advice. The tax information contained herein is general and is not exhaustive by nature. It is not intended or written to be used, and it cannot be used by any taxpayer, for the purpose of avoiding tax penalties that may be imposed on the taxpayer under U.S. federal tax laws. Federal and state tax laws are complex and constantly changing. Investors should always consult their own legal or tax advisor for information concerning their individual situation.

This does not constitute a recommendation of any investment strategy or product for a particular investor. Investors should consult a financial professional before making any investment decisions.