Kicking off the first-ever NAPA Cyber Summit on Sept. 9, NAPA Executive Director Brian Graff, along with Preston Rutledge, former head of the DOL’s Employee Benefits Security Administration, reviewed the key policy proposals that could have a major impact on plan advisors.
Attendees at the opening general session also heard from policy advisers to the Trump and Biden campaigns about the candidates’ plans for retirement policy.
Election Outlook
Noting that his first priority is for a strong retirement system, Graff explained that from a risk assessment standpoint, the biggest risk to the retirement system is when one party, whether it’s Republican or Democrat, controls everything. And if the Democrats sweep this year’s election cycle, party nominee Joe Biden’s proposal to equalize the tax treatment of retirement savings plans across the income scale poses a significant risk.
An idea that has been around for a long time, the proposal would replace the current tax deferral with a flat tax credit. “Our concern with this approach is it completely ignores the impacts of the non-discrimination rules,” Graff observed. “If you take away the value of the tax incentive for the small business owner without addressing the non-discrimination rules, you’re going to disincentivize small business owners from having plans or make them less likely to have contributions.”
Echoing Graff’s comments, Rutledge, who recently launched his own consulting firm, noted that the idea to replace the deduction with a tax credit came up in 2011 when he was at the Senate Finance Committee. While it didn’t get traction at the time, it’s possible that it could this time around, he said. Rutledge noted that “lurking beneath the surface” is that this proposal raises a lot of revenue, which can provide the means to address a lot of other initiatives with the money. “Because retirement savings reforms so often raise revenue, and that can either reduce the deficit or it can pay for some other initiative, it makes it a perennially tempting area,” Rutledge observed.
Trump and Biden Campaigns
Steve Cortez, a senior advisor for strategy for the Trump 2020 campaign and former CNBC contributor, noted that President Trump is committed to maintaining prosperity in the retirement industry. He outlined three policy priorities of the President’s:
- there will be no Rothification of non-Roth plans or any other major change to 401(k)s;
- he rejects the idea of a financial transaction tax; and
- he remains committed to tax and regulatory relief in a second term.
By contrast, Ben Harris, a senior advisor with the Biden campaign, noted that the former Vice President will be a protector of Social Security and supports a proposal to increase benefits for those who may have been hit with unexpected costs. Harris noted that Biden also supports an increase in the payroll tax for those making more than $400,000 and suggested that Biden’s plan would make retirement incentives more equal, contending that the “vast bulk of benefits goes to the richest Americans.”
Graff said he believes a better way to address their concerns is to boost the Savers Credit, explaining that it could be expanded and smoothed out so that it increases the incentives for lower-income savers without taking away the incentives for business. Graff also noted that he would be supportive of an idea in the Biden plan to require all employers with at least 10 employees to have some type of payroll savings plan as an automatic 401(k), similar to a proposal from House Ways & Means Committee Chairman Richard Neal (D-MA).
COVID-19 Relief
Turning to the prospect of additional COVID-19 relief, Graff noted that there’s still a possibility for enacting another round of legislation before the election, but he wouldn’t necessarily bet on it, as the two parties have become entrenched in their views. Graff noted that the American Retirement Association continues to push for relief for sponsors of 401(k) plans.
Graff also explained that the ARA is looking for relief for safe harbor plans so that they would be able to reduce or eliminate their employer contribution and maintain their safe harbor status, with a possibility of extending that through the 2021 plan year. He observed that a relief package could still happen this month as part of a Continuing Resolution to keep the government running or later in the year as part of a lame duck session—which might also include relief for multi-employer plans and single-employer DB plans.
Electronic Delivery
Thanking Rutledge for his leadership on this issue, Graff emphasized that the new e-delivery regulations are a big deal for plan sponsors and participants alike, in terms of administration, saving the system of lot of money and making it easier for participants to get access to better information than they could by getting something in paper form. Graff explained that as long as plan sponsors have a good electronic address, they can begin implementing the regulations now. Moreover, the required single, one-time paper notice can also be deferred under relief provided by the DOL because of the COVID-19 pandemic. Under that relief, that first-time notice can be delayed until 60 days after the end of the national emergency.
Rutledge explained that the final regulation includes a second safe harbor which allows the employer plan sponsor to also utilize an electronic address and send a document via a PDF, allowing employers to mix and match. It may be, for example, that an employer might want to send something like a Summary Plan Description or a Summary of Material Modification via PDF and do everything else on the webpage, Rutledge noted.
The former Assistant Secretary also urged plan sponsors to pay careful attention to whether they get a bounceback from an electronic address. While you don’t have to immediately send paper under the current rule, you do “have to promptly cure the invalid electronic address,” he explained. One way to cure a bounceback is if you have a secondary address for the same participant, you can use the secondary address, or you can go to the participant to ask for a valid electronic address. “If there’s one thing you take away from this meeting on electronic disclosure on this particular topic, it’s do not ignore bouncebacks—and promptly cure them,” he stated.
ESG Investing
Graff noted that the American Retirement Association and many other organizations have concerns regarding the proposed ESG regulation from the Labor Department, and discussed with Rutledge what he thought DOL was thinking in issuing the proposal.
“One of the things in terms of the actual role that we are concerned about is a blanket prohibition on ESG considerations with respect to any QDIAs. So, a target date fund that in its investment policy would require underlying investment companies to have governance policies, arguably wouldn’t qualify, even though governance policies are pretty important from an investment management standpoint,” Graff observed.
“I think if you parse out the description and the way it’s discussed in the rule, what you’ll find is that the concern is really about the duty of loyalty,” Rutledge said, noting that the concern is that “when you’re dealing with a default, you’re dealing with a participant who has by definition, not made an affirmative decision to invest.” Rutledge added that if ESG is a factor, even a financial one, there seems to be a concern regarding a fiduciary’s personal views about what kind of social policies are appropriate.
Still, Graff pointed out, a QDIA must be a well performing fund, and like any default investment, the participant certainly has the right to change those investments. What’s more, Graff noted, he thinks there's a misconception that ESG investing can’t also be financial, contending that arguments can be made that good governance policies are critically important to any corporate investment and that ESG considerations are also financial considerations.
Graff also suggested that if there’s a change in administration, he fully expects this issue to be revisited and might be concerned that a Biden administration would go too far the other way.
DOL Fiduciary Advice Proposal
There’s good news for NAPA members on an issue that the organization has been working with the DOL for a long time on: the Department’s fiduciary advice proposal clearly allows for a 401(k) fiduciary advisor to work with participants on rollovers. “For many participants, their 401(k) advisor is the only advisor they’ve ever met, and we want to be able to have those relationships continue,” Graff explained, adding that the proposal provides a clear roadmap.
One thing to keep in mind, according to Rutledge, is that one of the foundational reasons the 5th Circuit Court of Appeals overturned the 2016 rule is that the rule went too far in making people fiduciaries where the relationship between the advisor and the participant had not developed into a relationship of trust and confidence. He observed that some people are saying that this approach under the “reasonable basis” test may run afoul of the trust and confidence prong of the test.
Rutledge explained that a provision in the proposed prohibited transaction exemption says that if you want to take advantage of it, you have to acknowledge that you’re a fiduciary and sometimes advisors don’t believe they’re fiduciaries, but want to follow the exemption to be safe. “We’ll see how the department handles it, but I think it’s a fair point that if you want the largest number of people to use this as possible, then you might want to rethink forcing folks to acknowledge [fiduciary status],” he said.
If Biden were to win in November, Graff observed, this regulation and probably the SEC’s Regulation Best Interest will be reviewed—yet again.
