Senators Bill Cassidy, R-Louisiana, and Tim Kaine, D-Virginia, introduced the bill to the Senate Health, Education, Labor and Pensions Committee. The bill would change the minimum age for retirement plan inclusion to 18 from 21 for plans governed by the Employee Retirement Income Security Act.
Michael Kreps, a principal in Groom Law Group and a former senior counsel for the Senate HELP Committee, says that “ERISA and the [Internal Revenue] Code allow a plan sponsor to exclude employees that are under 21.” He adds that this “is not required, but it is permissible. The justification for that rule is that plans are really designed for longer-term employees, and young employees are often in temporary or short-term positions.”
Since the bill would replace 21 with 18 for this purpose, plans could still include workers younger than 18. Plan sponsors would not be able to exclude those between 18 and 20 solely because of age. The bill does not modify other length-of-service requirements that can be set by the sponsors.
Since adding many young workers all at once could force some smaller plans to have to file mandatory audits, the bill comes with a five-year buffer. Any plan that admits workers aged 18 to 20 to their plan as a consequence of the bill would not have to count those new participants toward the audit threshold until five years have passed from the date that the first new 18-, 19- or 20-year-old was added to the plan.
Kreps explains that the bill would add “more participants to plans, which could result in some plans crossing the audit threshold.” Because of the five-year grace period, “if you don’t need an audit under current law, you won’t need one if this bill passes.”
The Senate HELP Committee has not yet outlined a timetable to advance the bill.
The Factors at Play in IBM’s Shift to a Cash Balance Plan Reviewed
IBM’s move away from the 401(k)matchleads industry experts to evaluate the shortcomings of defined contribution plans in providing guaranteed lifetime income.
With the recent news of IBM replacing its 401(k) matching program and reverting to its cash balance plan, many industry experts are pondering whether this will have a ripple effect, causing other companies to rethink defined contribution plans and convert to cash balance defined benefit plans in order to meet participants’ retirement income needs.
In a webinar hosted on Wednesday by Callan and October Three Consulting, panelists discussed the “retirement conundrum” and how defined contribution plans alone are falling short of providing sufficient income in retirement.
John Lowell, partner at October Three, explained how IBM was uniquely set up to make the transition from a 401(k) plan to a new “Retirement Benefit Account,” which will begin January 1, due to a history that set up an overfunded pension plan.
In 2004, IBM announced it was “soft freezing” its cash balance pension plan, which had been previously converted from a final pay pension plan. This meant that no new participants could enter the plan. Then, in 2006, IBM announced that their plan would be “hard frozen,” no longer allowing accruals or pay credits for anyone in the plan. The tech giant later replaced the cash balance plan with a defined contribution 401(k) plan.
When IBM made its exodus from the DB market, Lowell says many companies followed suit and started shifting to DC plans, as well.
Fast forward to earlier this month, when a company memo leaked on Reddit revealing that IBM is ending its 5% DC matching contributions and 1% automatic contributions to employees’ 401(k) accounts in favor of an automatic 5% retirement benefit provided to all employees.
The company will still allow employees to make deferrals into a 401(k), but will direct 5% of each employee’s salary into a Retirement Benefit Account. An IBM spokesperson said: “The RBA adds a stable and predictable benefit that diversifies a retirement portfolio and provides employees greater flexibility and options.”
According to IBM’s most recent Form 5500 filing, 97% of employees were deferring to the 401(k) plan, Lowell said. Currently, IBM automatically enrolls new employees into the DC plan at 5% of eligible salary and performance pay after approximately 30 days of employment with IBM, unless they elect otherwise.
Lowell argued that because IBM’s pension plan is likely overfunded at this point, the company could apply that surplus to pay for some of the future cash balance accruals.
“There is clearly a cashflow benefit to them doing this,” Lowell said.
The ‘Retirement Conundrum’
Lowell further argued that IBM’s recent move is indicative of participants’ concerns about guaranteed income, as they are anticipating Social Security cuts and inflation is cutting into people’s disposable income.
According to a recent EBRI survey presented during the webinar, when asked to rank a variety of priorities when it comes to retirement income, the top two priorities, by an overwhelming margin, were having access to money and having a guaranteed income stream for life.
“Both DB and DC plans can provide access to money—DB plans in terms of lump sums and ongoing income streams, and DC plans in terms of lump sum payouts [and] some of the distribution options that are available,” said Emily Hylton, senior vice president at Callan. “The traditional pension plan is perhaps the purest form of providing a guaranteed income stream for life, and that is something that retirees are really looking for.”
Phil Merdinger, a partner at October Three, also spoke about the concept of the “three-legged stool,” consisting of the primary three ways that people have traditionally funded retirement: personal savings, employer-provided benefits and Social Security. But Merdinger said the “legs are getting sawed off the stool.”
“Changes about how retirement benefits are delivered to employees, concerns about Social Security benefits in the future, concerns about deferring retirement age [and] the trend toward freezing or terminating defined benefit plans has really put the stool [on the edge of] collapse,” Merdinger said. “It’s forcing things out of equilibrium.”
Merdinger suggested that there is “too much emphasis on employees bearing the responsibility of saving for retirement” and that many are worried about not being able to afford retirement. If people are not retiring, he said it is a problem for both employees and employers.
“If people can’t afford to retire, you’re going to start seeing changes in your workforce,” Merdinger said. “You’re going to see blockage with people not leaving, [causing] a lack of ability for people to get promoted and move up in the organization as workforces age [and] health care costs will go up.”
In order to address this imbalance, Lowell suggested a number of strategies, including lifetime income offerings provided by the employer, while letting employees supplement that foundation through 401(k) or 403(b) contributions.
Setting up a Cash Balance Plan
Lowell added that Section 348 in SECURE 2.0 has allowed more companies to set up cash balance plans. In proving that a plan does not impermissibly backload accruals, a plan sponsor can now assume an interest credit that is a “reasonable” rate of return, provided it does not exceed 6%.
Hylton said the amount of lifetime income a participant will receive from a cash balance plan can vary greatly depending on the industry.
“If you come from the financial services industry, an individual having a cash balance likely [has] other supplemental pools and a fair amount of outside assets,” Hylton said. “Some studies have shown that individuals leave assets in that cash balance plan when they have outside assets.”
Others might take a lump sum payout if they need the cash more immediately and do not have outside assets to draw from, Hylton explained.
Lowell encouraged employers to take note of what IBM is doing and evaluate whether this sort of shift is advantageous to their companies and workforces.
“In this increasingly competitive market for employees and the heightened focus of the younger generations on savings for retirement, taking steps to modernize a retirement program could provide a competitive advantage,” Lowell ssaid in comments that echoed an article October Three published this week.
