Compliance July 5, 2022

Hopes Are High for Lame-Duck Passage of SECURE 2.0

One retirement industry policy expert says the conversations she is having on Capitol Hill make her optimistic that the ambitious retirement reform package could pass after the November elections.
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Last week, Melissa Kahn, the managing director of retirement policy at State Street Global Advisors, sat down with PLANSPONSOR for a discussion about her recent work in the nation’s capital.

Kahn said she agrees with other Washington watchers who say the passage of a new round of federal retirement planning reforms looks likely. Hurdles remain, she warned, such as the upcoming November elections and a general lack of floor time in the Senate. However, Kahn said she is firmly in the optimistic camp when it comes to the passage of a key legislative package often referred to as “SECURE 2.0,” in reference to 2019’s Setting Every Community Up for Retirement Enhancement Act, aka the SECURE Act.

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As Kahn explained, retirement industry practitioners view the SECURE Act as the most important legislative update to the U.S. defined contribution retirement planning system in a generation. Now, the odds are strong that the package of additional reforms referred to as SECURE 2.0 could become law as soon as the end of this year.

As recounted in the Q&A below, Kahn feels retirement policies will remain one of the few areas of nearly complete bipartisan consensus in a political era defined by disagreements and divisions. As such, she said, it is important for the retirement industry to take advantage of this rare opportunity for rapid, meaningful legislative progress.

PLANSPONSOR: Can you please reflect on the current legislative and political environment, and especially on the recent advancement of key pieces of retirement legislation in the Senate?

Kahn: Simply put, 2022 has seen a real flurry of legislative activity impacting the retirement planning industry. For the most part, everything we have seen has been very positive on the legislative front, with the House and Senate leadership coming into alignment around SECURE 2.0.

Based on what I hear in private and what is unfolding in the public eye, it seems that the SECURE 2.0 package is marching forward in a positive way. The House is done with their part, having passed the whole package already, and the two key Senate committees are making real progress. We applaud them for working together on such an important issue for the American people.

I think the momentum we are seeing ties back to the true bipartisan nature of retirement policies. This has always been an area where both parties could come together. Retirement is a real issue for all of their constituents, and frankly, I think a lot of the members also see retirement as a personal issue. They will all have to retire at some point themselves, and that makes the issue very real. They know a lot of people, their constituents, are going to live as many as 30 or even 40 years in retirement, and they understand that this is a daunting prospect.  

PLANSPONSOR: What do you see as the most important part or provisions in SECURE 2.0?

Kahn: It’s really about the comprehensive nature of the package—there is not really any single blockbuster provision that will change the game by itself. Rather, like SECURE 1.0, the new package tackles many different areas in different ways. It will help to improve account portability, it will expand plan access, it will address the need for efficient emergency savings and it will help ease the burden of delivering retirement income. All of these different areas are addressed.

Some of the provisions that I think stand out the most include the proposal to allow 403(b) plans to invest in collective investment trust vehicles. Historically, these plans have been restricted to only using mutual funds and annuity contracts. On the other hand, 401(k) plans can already invest in CITs and other types of investment vehicles that may be more cost effective. Another helpful provision in the 403(b) space is the ability for 403(b) plans to begin to join open multiple employer plans—again, just like 401(k) sponsors can already do.  

There are helpful provisions speaking to expanding automatic enrollment that could prove to be very powerful if adopted. Other popular features are a higher catch-up contribution limit and the lifting of a cap on the use of qualified longevity annuity contracts.

PLANSPONSOR: Can you describe what your conversations with lawmakers on Capitol Hill are like? Do they expect to see this package become law?  

Kahn: Absolutely. The first thing to say is that educating the lawmakers is a critical part of getting this legislation passed. On that front, the meetings are going really well, and we think we will get over any remaining hurdles. We think the various bills in the House and Senate will be reconciled successfully.  

I’ve been in meetings with many staffers at this point. Their almost unanimous view is that this is going to happen at the end of the year. What is happening now that the two key Senate committees have passed their bills is that the staff is having their pre-conference conversations about how they are going to align the bills.

It’s possible a full Senate vote could happen pre-election, but I think that is very unlikely. My view is that SECURE 2.0 will likely be included as part of a larger bill in the lame duck session, not dissimilar to SECURE 1.0.

Investing June 23, 2022

Benchmark Properly for Access to Alternatives

After precedent-setting decisions, plan sponsors may have a clearer road ahead for incorporating alternative investments in defined contribution plans.
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Art by OYOW

For defined contribution plan sponsors to offer participants access to alternative investments, it’s all about—not the Benjamins—the benchmarks.

There is greater transparency for plan fiduciaries when incorporating alternative investments into DC plans after courts ruled in favor of Intel Corp. and its investment committees in a protracted Employee Retirement Income Security Act case, according to an ERISA expert.  

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The pair of court decisions from the U.S. Supreme Court and U.S. District Court for the Northern District of California helped to clarify key aspects of the pleading standards that apply to fiduciary breach claims brought under ERISA, says Kevin Walsh, principal at Groom Law Group.  

The rulings could lead to increased plan sponsor allocations to traditional alternatives—private equity, private credit, hedge funds and private real estate—in 401(k) plans, Walsh explains.

“The Intel decision has really done a great job of highlighting the importance of benchmarking in terms of adoption of funds that have allocations to these asset classes,” which was a legal issue that continued to arise before the Intel decision was settled, Walsh explains.

The courts made clear that ERISA lawsuits brought against plan sponsors were being based on inappropriate fee comparisons. Plaintiffs, in complaints, would often compare a target-date fund with an allocation “to traditional alternatives to a target-date fund that just was purely indexed,” he says.

“It seemed as though the [plaintiffs’] argument that was being made was ‘the fees are higher,’” Walsh says. “Since that decision, there’s been a better recognition that the key metric really is risk-adjusted performance net of fees. [Courts were] reminding plaintiffs that if you’re going to benchmark, don’t just pick the thing with the lowest fees, pick something that’s going to get you the same risk-adjusted performance net of fees.”

Walsh adds that this legal position was strengthened by the 6th U.S. Circuit Court of Appeals ruling this month in favor of the defendants in an ERISA lawsuit targeting CommonSpirit Health, a large not-for-profit corporation that provides hospital services across the United States.

“[That] case highlighted the importance of apples-to-apples benchmarking,” he explains.

The court rulings could lead to greater access to alternatives in DC plans. Walsh distinguishes traditional alternatives from “emerging” alternatives, such as digital assets and cryptocurrencies.

“In the long run, it makes it easier for there to be more adoption of products that allocate to traditional alts, and it does so because it reminds folks that when you benchmark, you need to benchmark something that is comparable, as opposed to benchmarking against just the lowest fee option, even if it’s not designed to get you some more investment performance,” Walsh says.

President Joe Biden’s administration has let stand Department of Labor guidance issued under the Trump administration that confirmed plan fiduciaries can allow select private equity strategies in DC plans without violating ERISA. Late last year, the Biden DOL issued a supplemental statement cautioning plan fiduciaries from including private equity investments that targeted smaller plan sponsors.

Retirement industry experts say that the DOL statement did not reverse policy or constitute a substantive change to the prior guidance.

Walsh explains that while alternatives have grown in DC plans, movement in the space is “incremental,” he says.

“The big shift that we’re seeing is that consultants are now talking about target-date funds that allocate to alternatives more broadly,” he says.

State and local government 457 DC plans, which are not governed by ERISA, can readily innovate by offering access to alternatives more easily. 

“Because of the different regulatory structures of governmental plans versus private pension plans, it’s a lot easier for governmental plans to allow defined contribution participants to essentially buy a slice of the defined benefit plan than it is for a private employer to do that, and that’s really the cutting edge,” he says.

Mega DC plans with a legacy DB plan, closed to new workers, are also innovating in the space by unitizing slices of the pension for access by 401(k) participants, Walsh adds.

“What they’re doing is they’re essentially allowing their defined contribution plan participants to put money into the basket that they’re already managing for the defined benefit plan,” he says. “It’s the most sophisticated plans that seem to be identifying the value. That DOL second letter was targeted more at the most sophisticated plan fiduciaries and so I think that’s where we’re seeing the most uptake.”

 

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