The U.S. House of Representatives subcommittee on Health, Employment, Labor, and Pensions considered four pieces of legislation that would update the Employee Retirement Income Security Act, which subcommittee Chair Rep. Tim Walberg, R-MI, said was “beginning to show its age.”
Proposals that would encourage wider adoption of annuities in 401(k) plans, increase the cash-out limit for former employees, promote Multiple Employer Plans for small employers, and allow participants to get plan documents via email met little opposition from lawmakers and the four panelist invited to testify.
More comprehensive retirement legislation, the Retirement Enhancement and Savings Act, was unanimously voted out of the Senate Finance Committee in 2016, and recently introduced in the House. It was not formally considered during today’s subcommittee hearing.
RESA includes provisions that would address three of the bills considered by the HELP committee. It was introduced in the House by Rep. Mike Kelly, R-PA, and has 36 cosponsors—18 from each party.
The House version of RESA was referred to the Committee on Ways and Means, in addition to the Committee on Education and the Workforce, which likely explains why it wasn’t taken up in today’s subcommittee hearing, sources said. [Read more below the slideshow.]
1. Annuity selection safe harbor
Increasing Access to a Secure Retirement Act of 2017, cosponsored by Chair Walberg and Rep. Lisa Blunt 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, senior managing director at TIAA, testified that only 5 percent of 401(k) plans offer annuities, largely because an existing Labor Department safe harbor requires plan fiduciaries to determine the long-term solvency of annuity providers.
“The changes proposed are critical and long overdue,” said Mr. Walsh. TIAA commonly includes annuities in the 15,000 institutions it servers, most of which are 403(b) plans.
“Annuities are the only private market solution that offer guaranteed returns and guaranteed lifetime income,” he said.
Wider adoption of annuities in 401(k) plans would give participants vast economies of scale in the annuity market. Mr. Walsh cited Morningstar data showing the average fee on annuities is 230 basis points in the individual retail market, while participants in TIAA plans pay 50 basis points on average.
Mark Iwry, a senior fellow at the Brookings Institute and former senior advisor on retirement policy at the Treasury Department, said the existing requirement to vet the long-term solvency of insurers is the most “salient” barrier to expanding annuities in 401(k) plans.
“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.
A comparable provision is addressed in RESA, which Mr. Iwry said he was confident would ultimately pass the Congress.
2. Open MEPs
The Retirement Security for American Workers Act, introduced by Rep. Vern Buchanan, R-FL, would allow small employers to pool workers into Open MEPs.
Under existing regulations, employers must share a common nexus, such as a trade organization, and are subject to the Treasury Department’s “one bad apple rule,” which punishes all employers in an Open MEP if one fails to comply with regulations.
The bill is intended to promote wider adoption of 401(k) plans among small employers.
Paul Schott Stevens, CEO of the Investment Company Institute, testified that only 55 percent of workers employed in business with fewer than 100 employees have access to a workplace plan, compared to 85 percent in larger plans.
The existing one bad apple rule, which would be eliminated under the proposed legislation, is “draconian,” said Mr. Stevens. The rule could disqualify all assets in a MEP based on one employer’s actions, exposing participants to massive tax exposures.
Mr. Iwry said efforts to eliminate the one bad apple rule while he was at Treasury were unsuccessful.
Lawmakers and witnesses expressed no concerns over the legislation, the provisions of which are also included in RESA.
“It’s unanimous we need to move on this,” said Rep. Rick Allen, R-GA. “What can we do to get this ball moving?”
3. Electronic delivery of plan documents
The Receiving Electronic Statements to Improve Retiree Earnings Act would allow sponsors to deliver plan documents to participants via email.
The bill has 41 co-sponsors in the House—22 Democrats and 19 Republicans. Under ERISA, sponsors are required to deliver paper plan documents.
The proposed legislation is billed as a cost saver for sponsors. Those savings could be reinvested in plan assets, benefiting savers. Participants would be able to opt out of electronic delivery if they preferred paper documents.
“Participants who engage online are more involved, and tend to have higher account balances,” said Krista D’Aloia, vice president and associate general counsel at Fidelity, who testified on behalf of the American Benefits Council.
But Mr. Iwry expressed concerns that the default electronic delivery of plan documents has “not yet met the burden of proof” that it is in the interests of all plan participants.
“It’s not yet sufficiently clear whether people would be protected by an opt out,” said Mr. Iwry, citing an AARP survey showing 75 percent of participants preferred paper documents. “Why not give a choice that doesn’t favor paper or electronic delivery?”
He suggested more critical plan documents should be delivered by paper. He also raised questions as to how savings from electronic documents would reallocated to plans.
4. Increasing automatic cash-out limit for sponsors
The Retirement Plan Modernization Act would increase the cash-out limit for former employees’ 401(k) accounts from $5,000 to $7,600.
Under current regulations, employers can cash-out accounts under $5,000 at the termination of employment. If a participant does not give her employer rollover instructions, sponsors can move the money into an IRA that only invests assets in low-return principal protection investments.
In raising the cap to $7,600, and indexing it to inflation going forward, employers could avoid the cost of administering low-value accounts. Employers would not have to roll the accounts over.
Mr. Iwry cautioned lawmakers that they should carefully consider whether the proposed law would take away participants’ choice to leave assets in plan after leaving an employer.
Existing limitations on investment options on rollovers should also be addressed, he added.
“Can we use this work on the cash-out limit as an opportunity to promote portability more broadly?” asked Mr. Iwry. “Nothing now helps participants to do that. We could do better with a pension registry or a common information base.”