The House Education and the Workforce’s Subcommittee on Health, Employment, Labor and Pensions heard testimony May 16 on four retirement-related bills that members are confident will be approved before Congress adjourns for the year.
The hearing generally was viewed as an attempt to generate some momentum in the House for the bipartisan legislation that seeks to improve retirement plan access and administration by:
- easing the restrictions to open MEPs;
- allowing electronic disclosure;
- increasing automatic cashout limits; and
- providing an annuity safe harbor.
“Red tape and unnecessary federal restrictions stand in the way of lower costs for small businesses and have contributed to compliance uncertainty, making it harder for employers to provide their employees with retirement savings programs,” Subcommittee Chairman Tim Walberg (R-MI) said in his opening statement. “These are not the most encouraging things to hear as more Americans are retiring, and studies show that Americans should be saving more for retirement.”
Witnesses included Krista D’Aloia, Vice President and Associate General Counsel of Fidelity Investments; Paul Schott Stevens, President & CEO of the Investment Company Institute; Tim Walsh, Senior Managing Director at TIAA; and Mark Iwry, Nonresident Senior Fellow at the Brookings Institution. With a couple of exceptions, generally they were in agreement that the four bills would make it easier and more affordable for employers to offer retirement plans.
The four bills discussed were:
- the Retirement Security for American Workers Act (H.R. 854), which seeks to ease establishment of open MEPs by eliminating the “common nexus” requirement and the one-bad-apple rule.
- the Receiving Electronic Statements to Improve Retiree Earnings Act (H.R. 4610) to authorize the electronic delivery of retirement plan documents.
- the Retirement Plan Modernization Act (H.R. 4158), to 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.
- the Increasing Access to a Secure Retirement Act of 2017 (H.R. 4604), to amend ERISA to provide a fiduciary safe harbor for the selection of a lifetime income provider.
Components of H.R. 854 and H.R. 4604 have been included in the bipartisan Retirement Enhancement and Savings Act, which has now been introduced in both the House and Senate.
Perhaps of most interest to ARA members was the testimony of Investment Company Institute President and CEO Paul Schott Stevens, who highlighted the recent study commissioned by the American Retirement Association and ICI showing a “compelling and urgent need” to shift the default method for communicating plan information to electronic delivery, while still allowing participants to opt for paper.
“The rules for using electronic delivery must be updated to reflect the dramatic and advantageous evolution in technology, and its expanding availability, over the past decade,” Stevens testified. He emphasized that making electronic delivery the default method will enhance the effectiveness of ERISA communications, maintain security of information and produce significant cost savings for 80 million retirement investors. In addition, he explained how internet usage has become virtually universal among plan participants, with the study citing data that, as of 2016, 93% of households owning DC accounts have access to the internet, up from 86% in 2010.
Not all witnesses were fully on board with their support of H.R. 4610, however. Brookings’ Mark Iwry acknowledged that there’s a great deal of merit to electronic communications, but added that he’s “not fully convinced” that the legislation as currently drafted has adequate consumer protections in place.
In response to a question from Rep. Joe Courtney (D-CT), Iwry contended that it’s not yet sufficiently clear whether people would be protected with an opt-out. He suggested giving people a choice with either paper or an electronic format, referencing an AARP survey reportedly finding that most respondents prefer paper.
“The bill provides for annual paper disclosure of participants’ elections regarding paper or electronic disclosure. What are the reasons for not combining this information in the annual paper statement with the most crucial information about the participant’s benefits and status under the plan?” Iwry asked.
He also recommended that the committee look at how any cost savings from electronic delivery are allocated, adding that any savings should be not at the expense of those who prefer paper and should return to participants. Nevertheless, both Iwry and Courtney indicated that they believe necessary adjustment could be made to generate support for the legislation.
In general, all of the witnesses offered their support for H.R. 854, which would facilitate open MEPs by eliminating the “common nexus” requirement and the one-bad-apple rule. Iwry suggested that the group purchasing power and economies-of-scale afforded to plan sponsors by open MEPs would help tremendously.
Lifetime Income Solution
The witnesses also voiced their support of H.R. 4604, which would provide a fiduciary safe harbor for the selection of a lifetime income provider. TIAA’s Tim Walsh explained that many employers remain reluctant to use an existing safe harbor to provide a lifetime income solution, contending that the guidance was not clear and unworkable, and believes that the legislation will give employers the support they are looking for.
H.R. 4158 would increase the existing $5,000 limit on cashouts to $7,600 and build in an inflation index going forward. Krista D’Aloia, Vice President and Associate General Counsel with Fidelity Investments, who testified on behalf of the American Benefits Council, offered support for the updated limit, contending that it would improve the efficiency and administration of retirement plans.
D’Aloia explained that the current rule reflects an important balance, but that it needs to be updated. “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 stated.
She noted that the cashout threshold is one of the few dollar figures applicable to retirement plans that is not currently indexed for inflation. “By indexing the cash-out limit automatically along with other dollar amounts, thresholds and limits, Congress would put this issue on auto pilot, so Congress would not need to act again every 10-20 years,” she stated.
D’Aloia further emphasized that the bill would not mandate that an employer increase its cash-out threshold and that it would also preserve important employee protections, including the right to a direct tax-free rollover to an IRA.
Iwry raised the point that, while current law is generally intended to help preserve retirement benefits in plans and discourage pre-retirement cashouts, he suggested that the automatic IRA rollover provision should be improved. He explained that automatic rollover IRAs generally are invested in principal preservation assets in accordance with existing regulations, but because earnings on these investments often fail to cover the administrative costs of maintaining the IRA, many of these IRAs are shrinking in value and additional automatic rollovers would increase the number of these accounts.
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. “In our mobile economy, multiple small benefits accumulated in different employer plans over the course of a career can add up to meaningful totals if preserved for retirement and allowed to continue growing on a tax-favored basis,” he stated.