According to the Government Accountability Office (GAO), about half of private sector workers in the United States are not covered by a workplace retirement plan. That’s a problem when you consider workers are 15 times more likely to save for retirement when a plan is in place. To expand coverage, Congress is considering ways to encourage plan sponsorship by employers. Two bills under current consideration are the Setting Every Community Up for Retirement Enhancement (SECURE) Act and Retirement Enhancement and Savings Act (RESA). They have similar 401(k)-related provisions. I have mixed feelings about them.
I don’t think the bills have much of a shot at expanding retirement plan coverage in a meaningful way. With no government mandate, the only way to expand retirement plan coverage is by encouraging more employers to sponsor a plan. In my view, the best way to do that is by making retirement plans as cost-effective, simple-to-run, low-liability, and necessary to retain employees as possible. I don’t think the SECURE Act and RESA would advance that goal by much – if at all.
That’s not to say I dislike the SECURE Act and RESA. In fact, most provisions offer welcome – albeit incremental – reform. The provisions I don’t like would reduce barriers to complicated and opaque 401(k) products and investments favored by many large insurance and mutual fund companies. I think these products and investments are likely to benefit providers more than 401(k) participants.
Below are key 401(k)-related provisions of the SECURE Act and RESA. Based on my opinion of them, they’re categorized as good, bad, or ugly.
- Increased tax credits – the tax credit for starting a new 401(k) plan would increase to the greater of (1) $500 or (2) the lesser of (a) $250 multiplied by the number non-highly compensated employees eligible for plan participation or (b) $5,000. An additional credit would apply to plans with an automatic enrollment feature. These credits would be available for up to three years
Love this change. However, I would prefer an ongoing credit that encourages employers to pay 401(k) administration fees from a corporate account, instead of plan assets, annually.
- Lifetime income disclosure – 401(k) benefit statements would be required to include a lifetime income disclosure at least once during any 12-month period, illustrating the monthly payments the participant would receive in retirement based on their total account balance.
This disclosure would be helpful. I think all 401(k) participants should target monthly income instead of an account balance when saving for retirement. Otherwise, they could easily underestimate the cost of a retirement that could last decades.
- Plan adoption – employers would be allowed to adopt a new 401(k) plan for a tax year up to the due date of that year’s tax return.
This change would give employers additional time to cover their employees with a profit sharing contribution.
- Safe harbor 401(k) plans – the annual notice requirement for nonelective safe harbor plans would be eliminated and the amendment deadline for becoming a nonelective safe harbor plan would be extended – up the last day of the following plan year if a 4% nonelective contribution is made.
- Automatic enrollment – would increase the safe harbor default deferral rate maximum from 10 percent to 15 percent.
- Participant loans – participant loans distributed through credit cards or similar arrangements would be prohibited.
- Part-time workers - Today, part-time employees (employees who work less than 1,000 hours per year) can be excluded from a 401(k) plan. 401(k) plans would be required to cover employees that complete at least 500 hours of service annually for three consecutive years. The part-time employees could be excluded from nondiscrimination, coverage and top testing.
While I fully support more liberal 401(k) eligibility requirements, this provision would be difficult to administer properly – not to mention, even 3 years is too long to keep part-time employees out. Instead of the 3-year rule, I would prefer an immediate eligibility requirement for salary deferrals.
- Multiple Employer Plan (MEPs) – would allow low two or more unrelated employers to join a Pooled Employer Plan (PEP) – a new type of “open” Multiple Employer Plan (MEP). A Pooled Plan Provider (PPP) would be the lead PEP sponsor. Employers that co-sponsor the PEP would be subordinate.
By commingling the 401(k) assets of multiple employers, supporters claim MEPs can offer lower fees and higher quality services to small employers with few 401(k) assets due to “economies of scale.” In truth, index funds and technology have made high-quality 401(k) investments and administration services accessible to employers of any size for very low fees. These highly-efficient 401(k) plans can cost much less than a MEP.
So why the support for MEPs in Washington? Money. For years, the financial services industry has lobbied Congress hard for MEPs. They can be highly profitable due to the discretionary power delegated to the MEP sponsor by employers. Department of Labor (DOL) officials have warned this power could lead to “layering of fees, misuse of the assets, or falsification of benefit statements.”
I think the financial services industry is more interested in selling MEPs than employers will be in buying them.
- Lifetime income providers - would create a new fiduciary safe harbor for employers that want to include a lifetime income investment option in their 401(k) plan. Specifically, a fiduciary would be deemed to have satisfied its fiduciary requirements with respect to the financial capability of the insurer if the fiduciary receives certain representations from the insurer as to its status under and satisfaction of state insurance laws.
The fiduciary safe harbor appears to only protect employers from a provider that can’t afford to pay promised benefits. The employer would still be responsible for determining whether the lifetime income option is “prudent” – basically, meet its investment objective(s) for reasonable fees. A tough job given the complexity of these insurance products.
These difficult-to-evaluate investments are not popular today and I don’t suspect the new fiduciary safe harbor would do much to change that. Especially considering 401(k) participants can generally purchase a lifetime income product themselves following a plan distribution.
Let’s expand coverage!
While the SECURE Act and RESA offer welcome 401(k) reform generally, I don’t think they’ll help expand retirement plan coverage by much. I mean, I just can’t accept that more complicated retirement plans and investments will encourage many employers to start a new plan.
In my mind, the key to expanding retirement plan coverage is simple – make retirement plans better. That means transparent plans that offer objective value to both employers and employees. I think a highly efficient 401(k) plan should be the baseline. Want something more? Add an ERISA 3(38) financial advisor for custom portfolio management and participant coaching.