Legislation
If the 116th Congress takes up retirement policy, some (perhaps, many) of the bipartisan proposals that were considered by the current (115th) Congress will be on the table. The following is an inventory of some of the more important of those proposals:
DC annuity fiduciary safe harbor: Current Department of Labor rules require that, where a DC plan offers an in-plan annuity, plan fiduciaries must conclude that “at the time of the selection, the annuity provider is financially able to make all future payments under the annuity contract.” Both the Senate’s Retirement Enhancement and Savings Act (RESA) and House tax legislation include proposals addressing this issue, generally by deferring to state insurance regulators on the issue of the financial condition of the annuity carrier.
Authorization of DC Open MEPs: Some proposals (e.g., RESA and House tax legislation) would authorize “Pooled Plan Providers” to offer defined contribution “Open” Multiple Employer Plans (MEPs) by eliminating the current DOL “nexus” rule and providing a solution to the IRS’s “one bad apple” rule for qualifying plans, subject to certain conditions. Other Open MEP proposals include a limited exemption from ERISA fiduciary rules for certain small employers.
Mandatory lifetime income disclosure: RESA includes a proposal that would require DC plan administrators to annually provide participants a description of the monthly “income stream” they would receive if their account balance were paid in the form of a single life annuity and joint and surviving spouse annuity based on assumptions specified in DOL guidance. Many industry organizations have raised concerns about this proposal.
Electronic participant disclosure: At the end of 2017, a bipartisan group of representatives introduced the Receiving Electronic Statements to Improve Retiree Earnings Act, under which any document required or permitted to be furnished to a participant under ERISA could be provided in electronic form as long as certain requirements (including a participant right to ask for paper disclosure) are met. This legislation would significantly relax DOL electronic disclosure rules, which currently generally require an affirmative participant election. President Trump’s Executive Order on Strengthening Retirement Security in America also highlighted this issue.
Proposals to expand coverage and increase savings: There are proposals (e.g., in draft Portman-Cardin legislation) to: (1) create a new 401(k) actual deferral percentage (ADP) testing auto-enrollment/escalation safe harbor based on increased default/escalation rates, and provide a (limited) tax credit for small employers with respect to matching contributions; (2) increase the small plan startup credit; (3) create a new small employer re-enrollment credit; (4) expand the Saver’s Credit; and (5) allow long-term part-time employees to participate in 401(k) plans.
Student loan repayments treated as elective deferrals for purposes of matching contributions: This proposal (draft Portman-Cardin legislation) would generally allow a plan to treat a student loan repayment (subject to certain limits) as “match-able” pursuant to rules similar to those applicable to “regular” 401(k) employee contributions (aka “elective deferrals”). However, the loan repayment itself would not be considered an employee contribution (e.g., for purposes of ADP testing). Related to this issue, on August 18, 2018, the Internal Revenue Service released Private Letter Ruling (PLR) 201833012, concluding that a 401(k) plan that provided for “an employer nonelective contribution on behalf of an employee conditioned on that employee making student loan repayments” did not violate Internal Revenue Code section 401(k) prohibitions on conditioning a benefit on an employee making elective contributions.
Missing participants: On February 28, 2018, senators Warren (D-MA) and Daines (R-MT) introduced the Retirement Savings Lost and Found Act of 2018, providing (among other things, and in a significant revision to their 2016 proposal) meaningful guidance and relief for sponsors on the issue of missing participants. More generally (and oversimplifying), the legislation would establish a “Retirement Savings Lost and Found” that would maintain a database of participant benefits in ERISA retirement plans. The bill would also reform rules applicable to benefit cash-outs, including adding reporting requirements, restricting the investment funds into which the cash-out distribution could be made, and raising the cap on forced cash-outs from $5,000 to $6,000.
Neal proposals: With the Democrats taking control of the House of Representatives, Congressman Neal (D-MA) is set to become chairman of the House Ways and Means Committee. At the end of 2017, he introduced two proposals, the substance of which is likely to be part of any 2019 retirement policy debate: the Automatic Retirement Plan Act of 2017, which would (with some very limited exceptions) require every U.S. employer to maintain an “automatic contribution” retirement plan; and the Retirement Plan Simplification and Enhancement Act of 2017, which proposes a number of improvements to current rules, fixing some technical issues but also making some important substantive changes. Neither bill had any co-sponsors.
Regulation
Fiduciary rule: On March 15, 2018, in a 2-1 decision, a three-judge panel of the Fifth Circuit Court of Appeals ruled for plaintiffs in Chamber Of Commerce of the United States of America, et al. v. United States Department of Labor, vacating in toto the DOL's Fiduciary Rule. The DOL did not appeal this decision. To clarify certain issues raised by the decision, on May 7, 2018, the DOL published Field Assistance Bulletin 2018-02, Temporary Enforcement Policy On Prohibited Transactions Rules Applicable To Investment Advice Fiduciaries, providing temporary relief for certain prohibited transactions that may result from the Fifth Circuit's decision.
On April 18, 2018, the SEC, by a 4-1 vote, proposed: (1) a “Regulation Best Interest,” providing new conduct standards for broker-dealers, (2) an “Interpretation Regarding Standard of Conduct for Investment Advisers” and (3) a requirement that investment advisers and broker-dealers provide retail investors a “Relationship Summary.” The SEC’s proposal addresses a number of the issues that were the subject of the DOL Fiduciary Rule. We previously posted two articles on this proposal, the first briefly reviewing the substance of the SEC’s proposed broker regulation, “Regulation Best Interest,” and the second reviewing the SEC’s proposed Interpretation Regarding Standard of Conduct for Investment Advisers.
On April 23, 2018, the DOL published FAB 2018-01 on economically targeted investments and proxy voting, stating (among other things) that, with respect to the Obama DOL’s prior guidance that “collateral goals” may be used as “tie-breakers,” “the Department merely recognized that there could be instances when otherwise collateral ESG [environmental, social and governance] issues present material business risk or opportunities to companies that company officers and directors need to manage as part of the company’s business plan and that qualified investment professionals would treat as economic considerations under generally accepted investment theories.”
Executive Order on Strengthening Retirement Security in America: On August 31, 2018, President Trump signed an Executive Order on Strengthening Retirement Security in America. The EO instructed the relevant agencies (DOL and IRS) to: “examine policies” that would eliminate ERISA regulatory obstacles to the creation of Open MEPs and regulations that would address the “one bad apple” Open MEP qualification issue; review notice and disclosure rules to make them more understandable while reducing the costs and burdens they impose; and examine the life expectancy and distribution period tables currently used to determine RMDs and determine whether they should be updated.
In response to the EO, on October 22, 2018, the DOL released a proposed regulation clarifying (and in some regards expanding) rules for which groups may adopt multiemployer plans (MEPs) under ERISA. The DOL did not, however, authorize Open MEPs, explaining that it “considered, but decided not to include [Open MEPs] … because they implicate different policy concerns.”
Hardship withdrawal guidance: The Bipartisan Budget Act of 2018, signed into law by President Trump on February 9, 2018, included several modifications to the 401(k) hardship withdrawal rules. On November 14, 2018, the IRS proposed amendments to those rules, providing a new and more flexible hardship withdrawal “safe harbor” and expanding the amounts that may be withdrawn from a 401(k) plan in a hardship withdrawal.
Many of these proposals are a work in progress, or may foster new, related initiatives. As we look into 2019, we intend to follow them closely, assessing their progress and the overall legislative and regulatory landscape for DC plans.
