Compliance May 1, 2019

Laws and Regulations That Do or Will Affect Retirement Plans

Plan sponsors can look for new legislation and regulations that will have big effects on retirement plans this year, and state legislation could add some confusion.

Reported by

Big retirement plan legislation is set to be passed fairly soon, attendees of the 2019 Plan Sponsor Council of America (PSCA) Annual Conference heard.

Never miss a story — sign up for PLANSPONSOR newsletters to keep up on the latest retirement plan benefits news.

Brigen Winters, principal at Groom Law Group, Chartered, said the Retirement Enhancement and Savings Act (RESA) was the basis for what Congress wanted to accomplish to expand retirement savings opportunities. But the “Setting Every Community Up For Retirement Enhancement Act of 2019,” or SECURE Act, which included provisions of RESA and more was passed by the House Ways and Means Committee less than one week after it was introduced.

In addition to language created to open multiple employer plans (MEPs) and to establish a fiduciary safe harbor for the selection of lifetime income options in defined contribution (DC) plans, Winters noted that the SECURE Act includes a change to the automatic escalation safe harbor from a max of 10% to a max of 15%. In addition, it changes the required minimum distribution (RMD) age from 70 ½ to 72.

Will Hansen, chief government affairs officer at the American Retirement Association (ARA), said he believes RESA may have passed last year if there had been no government shutdown. However, with the SECURE Act now moving, Winters says there is more bipartisan support. It could move forward to the full House of Representatives in the next one to four weeks and then go on to the Senate, who will then tweak it.

Hansen said he believes Senators will pull into the SECURE Act provisions of the Portman/Cardin bill that was introduced in December. He noted that the bill will be reintroduced soon.

Hansen added that an important provision of the legislation is language providing for the ability to match student loan debt payments made by participants. The ARA fears this will cause some participants who are both paying student loans and saving for retirement, especially low income workers, to stop allocating money towards their retirement. The ARA says it is working to get legislation to provide matched student loan payments in average deferral percentage (ADP) testing, so plan sponsors can still pass the exam. 

Regulations

David Levine, principal at Groom Law Group, Chartered, reminded attendees of an executive order issued by President Donald Trump that directed the Department of Labor (DOL) and IRS to look into expanding MEPs. The DOL has since responded with regulations for association retirement plans.

The executive order also wanted regulators to move forward on electronic delivery of retirement plan disclosures. Hanson said Congress has been working for more than a decade on legislation to make e-delivery the default option for disclosures, but he shared that the AARP opposes e-delivery as the default, and as long as it does, legislation will not pass.

Also in that executive order, the president spoke about stretching out life expectancy tables for calculating required minimum distributions (RMDs), to which Levine said the IRS is working on.  

Still ongoing is the problem of missing participants. Levine noted that the DOL has no guidance for finding missing participants, but its investigations with plan sponsors are still ongoing. According to Levine, some plan sponsors are using Section 411 of the Internal Revenue Code, which says if they can’t find a participant, they can just reinstate the account in the retirement plan. But, he said, sometimes DOL investigators are telling plan sponsors that is not enough.

Levine pointed out that the IRS has made self-correction of plan loan failures easier with Revenue Procedure 2019-19. He also said there will be final regulations for hardship withdrawals this year. “Plan sponsors should talk to recordkeepers about changes to their systems,” he told conference attendees.

Finally, Levine discussed the settlement in the Vanderbilt University 403(b) excessive fee lawsuit. Under the terms of the settlement, plan fiduciaries will have to contractually prohibit recordkeepers and other service providers from using plan participant data for the purposes of cross-selling. Levine told all plan sponsors they need to keep in mind who has participant data and how they are using it.

State laws

Hansen then turned to the activity going on in the states that affect retirement plans. “States started acting because nothing was happening on the federal level,” he said.

Illinois and Oregon were the first to pass legislation requiring employers to offer retirement plans to employees. According to Hansen, Illinois amended its corporate tax form with a check box to identify whether an employer offers a retirement plan, but there has been confusion in matching that up with retirement plan records. “This is one example of how state plans will lead to a variety of rules,” he said.

Many states are also introducing their own fiduciary rules; some referencing the DOL fiduciary rule and honing in on retirement products. New Jersey drafted a rule a couple of weeks ago, to which the ARA asked for a carve out for Employee Retirement Income Security Act (ERISA) qualified plans and the state agreed. “State fiduciary legislation really wants to protect individuals when it comes to rollover products,” Hanson said. “If there is no ERISA plan carve out, it could increase costs and confusion for plan sponsors and advisers, and states will probably face lawsuits about ERISA pre-emption.”
Data and Research May 1, 2019

Behavioral Insights About Retirement Income Decisions

A professor at the UCLA Anderson School of Management discussed biases that must be considered when helping people make retirement income decisions.

Reported by

Say the word “annuity” and many people turn up their noses, yet are anxious to take their Social Security benefits as soon as they can. What can help more people embrace something that guarantees lifetime income and delay taking Social Security so they can have greater income in retirement?

How to communicate trade-offs is one answer, according to Suzanne Shu, associate professor of marketing at the UCLA Anderson School of Management.

Get more!  Sign up for PLANSPONSOR newsletters.

Shu told attendees of the Plan Sponsor Council of America’s (PSCA) 2019 Annual Conference that although single-life annuities remove the risk of people  outliving their savings, those who don’t favor annuities are risk-averse. The risk they fear is dying before they get paid all their benefits. But, Shu said these folks are thinking of the way variable annuities work, not fixed annuities.

Shu discussed a research study, in which she was involved, that offered subjects a choice of three annuity options for which they could invest $100,000 at age 65. Recognizing individuals’ fear of dying before obtaining all annuity payments, all options were period-certain annuities. For example, the first had monthly payments starting at $400 and a 7% annual increase in payments for 30-years period certain—meaning if the annuitant died before 30 years, the remaining payment would go to a beneficiary. Of the three options, one used a $400 increase in payments rather than a percentage.

One thing Shu noted was with just basic information about the choices, more than one-third (36%) chose “if these were my only options, I would defer my choice and continue to self-manage my retirement assets.” Also, two in 10 chose an option with a set dollar amount annual increase in payments, and the biggest share of subjects chose an annuity option with the least period certain years and a 5% annual increase in payments rather than a 7% annual increase.

When study participants were given enhanced information—such as how much total the annuity will pay out over time and a table of payment amounts at different ages—to show the compounding of the percentage annual increase, more people chose annuities and many who first chose a dollar amount annual increase moved to the 5% annual increase. Still, nearly one-quarter (24%) chose no annuity.

Shu also told conference attendees that the majority of people declare Social Security at age 62—the earliest age at which they can take it. Claiming falls after that age with a slight spike at around age 66, the current Social Security retirement age, but few delay taking it until age 70 or later. “Many think, ‘That’s my money the government is sitting on; I want it back,’” she said. The strong sense of ownership is one reason people are so eager to claim Social Security early.

Another reason is the same risk aversion as with annuities, according to Shu. People don’t want to pass away before they get all their money, but they don’t consider how long they will live. In a study, people were first asked a series of questions about their chances of dying by certain ages. Later, the very same people were asked about their chances of living to certain ages. “There was a 10-year gap in the median expected age of death; people have a much higher life expectancy when they are asked about the chance they will ‘live-to’ a certain age,” Shu said.

Shu’s research has found that convincing people to claim Social Security at a later age is difficult with messaging, but there are some measures that have worked. For example, communicating to people that delaying the age they declare is a good idea for their financial well-being, telling people to consider the implications of living longer in retirement and letting them know about how many people regret claiming early all had significant impacts on individuals’ claiming age decisions.

Shu said helping individuals with decumulation decisions is harder than with accumulation decisions. Individual differences matter, from goals for retirement, to health condition and life expectancy. There is no one-size-fits-all decumulation product or plan, and communications about decumulation should not be either.

«