Mix of initiatives has something for both DB and DC sponsors
An eclectic package of retirement savings initiatives that would please plan sponsors worried about testing their defined benefit plans or maxing out contributions to defined contribution plans is quietly working its way through Congress, raising hopes that new ideas like open multiple employer plans and more lifetime income options are within reach.
"There are a lot of changes that are beneficial to plan sponsors and employers who are trying to offer efficient plans to participants, and to make those plans available and better functioning," said Shai Akabas, director of economic policy at the Bipartisan Policy Center in Washington.
Mr. Akabas sees the package as the promise of an even greater focus on retirement security. "I expect to see more proposals offered, hopefully bipartisan. I do think this will hopefully be the start of putting this back in the spotlight," he said.
The proposed Retirement Enhancement and Savings Act of 2018 was introduced March 8 in the Senate by Finance Committee Chairman Orrin Hatch, R-Utah, and ranking member Ron Wyden, D-Ore.
The bipartisan package, which mirrors a proposal introduced in the last Congress and unanimously approved by the Finance Committee, was expected to win Senate approval this month, and a House counterpart was introduced March 14. For now, its most likely path is to be included in a must-pass spending bill that both chambers have to address before the end of the month.
The bill covers a lot of retirement savings ideas, few of which are considered controversial.
"RESA is the product of a lot of different viewpoints and perspectives," said Lynn Dudley, senior vice president, global retirement and compensation policy for the American Benefits Council in Washington, who noted it addresses many of the group's policy recommendations. Another plus, she said, is "if you pass them, they make a difference immediately."
For sponsors of closed defined benefit plans, one provision of the bill makes it easier to comply with non-discrimination testing rules and to have related make-whole contributions to defined contribution plans.
Currently, some employers are finding themselves forced to freeze their DB plans to avoid running afoul of non-discrimination testing rules that become harder to pass each year as participants in closed plans get older and more highly compensated. "Every year, more sponsors have to grapple with this issue, and every year, more participants risk losing future benefits," said Ms. Dudley, who estimates that as many as 250,000 plan participants are at imminent risk.
RESA also calls for lifting a 10% safe harbor cap on default contributions for automatic enrollment and escalation in defined contribution plans. That will be increasingly important over time as more companies look to automatic enrollment and other ways to provide retirement security, said Ms. Dudley. "The flexibility to address this going forward is huge," she said.
Plans sponsored by cooperatives and small-employer charities would enjoy a much smaller premium to the Pension Benefit Guaranty Corp. under the bill, $19 per participant vs. $74 that single employers will pay for 2018.
Another section of the bill would make it easier to form open multiple employer plans. The plans would be of help to larger employers that use more independent workers and would like to offer paths to retirement savings. "Open MEPs are great for the gig economy, and it's a federal solution, not state by state. It is really important and it's the future," Ms. Dudley said.
Multiple employer plans also give smaller employers that want to offer defined contribution plans institutional buying power, said Robert Melia, executive director of the Institutional Retirement Income Council, a Washington-based non-profit retirement industry think tank of plan advisers, consultants and service providers.
His group's long-standing concern over plan participants being enticed into individual retirement account rollovers also would be addressed in the bill's proposals to promote lifetime income strategies within defined contribution plans and require plan sponsors to provide annual statements showing lifetime income coverage. "Having your projected balance presented to you as an income stream will be a real wake-up call," said Mr. Melia.
Plan sponsors worried about the fiduciary risk of vetting annuity providers would enjoy "a very easy safe harbor," he said, because the bill would allow the sponsors to rely on the insurers' representations of solid legal and financial footing. Those annuities would be portable under the bill, which treats a departing employee taking annuities elsewhere as a distributable event.
The bill's focus on lifetime income is good "as long as it is permissive and it is up to the plan sponsor whether they want to offer them," said Alan Glickstein, Dallas-based senior retirement consultant at Willis Towers Watson PLC. "What sponsors want is to be able to help people be able to leave the workforce. If we evolve to a world where lifetime income options are more available, they would be a much better option than defined benefit plans, which are closing."
Mr. Glickstein is less enthusiastic about the bill's call for sponsors to annually disclose lifetime income, a sentiment shared by the ERISA Industry Committee in Washington, which would like to see some tweaks. Disclosure "is a different animal. It's going to create much more confusion over time as interest rates change," he said.
Mr. Melia of IRIC said plan sponsors "just have to evolve. It's more about where the market is going and what provides the most security. It's just another way that you can meet the mission of your company and what you're trying to do" to promote retirement security, he said. "It's just common-sense reform that helps people save for retirement."