Compliance December 18, 2017

Retirement Industry Enthusiasm for New Approaches in 2018

Two retirement industry thought leaders reflect on the year that was; both agree there is a tremendous opportunity to drive positive change in 2018. Might a “new” Pension Protection Act be on the horizon?
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It is a common habit of journalists, as the winter holidays approach, to pause for reflection and attempt to distill the top trends and lessons learned in the previous year—and to forecast, however fortuitously, what the next one might bring.

This is also a habit of chief executives and boards of directors, confirms David Musto, president of retirement plan and college savings platform provider Ascensus. However, as Musto frankly observes, abstracting lessons from the 12-month whirlwind that was 2017 is not exactly easy to do for retirement and benefits industry professionals. The year brought challenging and unresolved debates about the role of government and employers in providing health care; a continuation of the glut of retirement-focused fiduciary litigation in courts across the country; and disappointingly little attention paid to the projected Social Security shortfall.

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Despite these challenges and many others, Musto also points to real sources of optimism for 2018. Perhaps chief among them, the recent introduction by Representative Richard Neal, D-Massachusetts, of the Automatic Retirement Plan Act of 2017, which in a phrase would require nearly all employers to have a retirement plan, either a 401(k) or 403(b) plan, and automatically enroll participants into the plan. Musto, some would say wisely in the current environment, refrains from “political handicapping” the likelihood of Congress taking on any stand-alone retirement legislation during 2018. Although he speaks highly of Rep. Neal’s approach to key reforms, Musto admits he is “unsure but optimistic” about the prospects of the bill’s passage in 2018.

“However, as I have been following the reporting that is out there on all these issues, I think there is another important story going on in the background that deserves attention,” Musto explains. “In the last couple of years there has been a new consistency to the voice of industry experts in advocating for the needs of retirement plans and participants, and I find this to be very encouraging for the future. This has helped to ensure that the tax reform effort, for example, does not seem to be targeting retirement plans in a negative way. This is one of the important stories for me for the next year. We’re seeing the public and private sector get more aligned around the desire to get more Americans engaged in retirement savings.”

Musto says the Automatic Retirement Plan Act, as introduced by Representative Neal, would support this burgeoning collaboration in more than a few key ways: “When you look at this and several other related proposals aimed at expanding access to open multiple employer plans (MEPs), which would not have an employer commonality requirement, and the growing emphasis on health savings accounts, it all shows government and industry working together in constructive new ways. And then within the education sphere, we see broad enthusiasm for increasing the use of 529 plans—for college and for other forms of tuition, such as for elementary and secondary school, as well as vocational programs.”

Summing it all up, Musto says the stakes are very high heading into 2018 for the employee benefits industry. Readers may recall there was a similar surge of interest/discussion bridging the public-private divide that helped propel the Pension Protection Act (PPA) of 2006 into law, under a Republican administration no less. 

“The evidence is so clear that requiring employers to step up and offer automated retirement savings would benefit a very large number of people,” he says. “When you consider the very long-term financial outlook of American workers, few other legislative changes we could make today would have such a dramatic positive impact for our country. Where employers have embraced this philosophy and embraced the PPA, younger workers are benefitting hugely from auto-features.”

Like other retirement industry executives, Musto argues increased savings via new employer-sponsorship mandates would be a boon to the overall U.S. economy and promote healthy capital markets. Also like other thought leaders, he warns about “thinking in terms of ‘either/or’ rather than ‘and.’”

“What I mean is that improving the U.S. retirement system will require a combination of solutions,” Musto concludes. “So this could mean combining open MEPs and traditional 401(k) plans.”

Different firm, but a similar take

Reflecting on the same set of subjects during another recent interview, Melissa Kahn, managing director of retirement policy for the defined contribution team at State Street Global Advisors, also voiced equal parts concern and optimism about what 2018 may bring for the retirement planning community.

“I would classify myself as optimistic that we are in for positive change,” she says, citing, like Musto, a newly emerging unity among industry advocates and government stakeholders. “For months the retirement community was very concerned that there was going to be ‘Rothification’ in some form included as part of the ongoing effort to cut taxes. At the time of this conversation, this seems to not be happening, and there have been various causes cited here. I agree that a more unified industry advocacy community helped, but I do also think the president and some individual Congressional members deserve some credit for speaking out on Twitter and to the public against this possibility.”

Kahn says it was particularly encouraging when she turned on the television one morning not long ago and saw “Rothificaiton” being discussed as the main topic on the Today Show, and there was clear concern about what this would do for people’s workplace savings habits: “When I saw that I was kind of blown away—I thought to myself, our issues are finally getting the mainstream attention we know they deserve. This is fantastic.”

“Having said that, I think that we should be very clear about the risks and opportunities we face next year,” Kahn continues. “It has been 11 years now since the Pension Protection Act was signed, so I really feel like we are over-due for major retirement legislation. There has been so much that has happened in the last 11 years in terms of industry development of best practices. So we owe it to ourselves to follow up on the success of the PPA.”

Hedging her predictions with a healthy dose of caution, Kahn speculates that, to some degree depending on the outcome of the 2018 mid-term Congressional elections, “we could see something major take shape next year akin to a new PPA.”

“I can’t say strongly enough how much we applaud Congressman Neal and his staff for their efforts here,” she notes. “They really introduced what we consider to be quite bold legislation. There are many key provisions in there, but in my eyes perhaps the most crucial item in there is to take the automatic individual retirement account idea and go a step further—which would mean creating an automatic 401(k) requirement for all employers. Instead of having to auto-enroll workers into an IRA, this would establish that any employer that doesn’t currently offer a tax-qualified plan for their workers would have to do so. And the auto-enroll would be significant, at 6% and escalating up to 10% over three years.”

Naturally, some of the same groups who have so dramatically opposed President Obama’s signature Affordable Care Act, viewing it as a government overreach, are likely to oppose the Automatic Retirement Plan Act. From Kahn’s perspective, she looks forward to participating in this healthy debate, and feels the side in favor of passage of a new PPA can ultimately win the day.

“When one projects the future of Social Security, Medicaid and other entitlement programs, we simply do not have a choice but to act now in a dramatic fashion to increase the amount and consistency of individual savings,” Kahn says. “It won’t be a slam dunk in 2018, but I think that what Congressman Neal is doing here is an honest attempt to help solve the retirement plan coverage gap, and for that reason it could go a long way even in today’s political environment. There are helpful exemptions programmed into the bill as well that could ease the initial burden for small employers.”

Specifically, the Automatic Retirement Plan Act largely excludes any employer with fewer than 10 employees, governments, church organizations, as well as employers with fewer than three full years in business.

“We see Representative Neal’s bill as being very thoughtful and workable here,” Kahn adds. “Even after these exclusions, the bill provides additional tax credits for helping to defray the cost of plan administration for the first five years. So you have really an eight-year window to prove a business is viable before having to fully commit to offering a plan—and then for the employers who continue down this road, they have no requirement whatsoever to make matching contributions. But if they do, they get a tax credit for that as well.”

Kahn says the other main takeaway is the “boost to the open MEP discussion.”

“I really do see open MEPs as the future—and not just for small employers, as we are hearing about today,” she explains. “Further down the road I think it’s going to be mid-sized and even large employers as well who are attracted to utilizing the open MEP approach. I think that employers of all sizes will see value in offshoring the administration of the plan, picking the recordkeeper, the selection of a fund menu, and all the other details that go along with being the fiduciary plan sponsor.”

Benefits November 29, 2017

ACA-Related Executive Orders Could Provide Pros and Cons for Employers

Some orders expand health plan options, especially for small employers, while others may mean higher premium costs.
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After centering an election and nearly a year into his presidency on the repeal and replacement of the Affordable Care Act (ACA), President Trump signed executive orders on October 12 anticipated to introduce and increase alternative, lower-cost health care options to individuals and small employers while dismantling ACA provisions.

 

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Shams Talib, executive vice president and head of Benefits Consulting at Fidelity, explains that the orders, which call on several agencies, including the Treasury, the Department of Labor (DOL), and the Department of Health and Human Services, to develop a proposed guideline within the upcoming two to four months, is divided into three components: growing association health plans (AHPs) across state lines to heighten demand among smaller employers; expanding the three-month coverage of short-term limited-duration insurance (STLDI); and increasing the use of health reimbursement arrangements (HRAs).

 

The expansion of the three are said to offer cheaper health care plans to attract younger, healthy individuals. For healthier workers who would otherwise elect the Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) when looking to continue health insurance coverage if leaving employment, Talib notes coverage with STLDIs may result in cheaper costs for those individuals.


“It’s likely that depending on how the short-term limited duration health insurance comes about through the executive order, that might be a better alternative than paying the full premiums for COBRA coverage, and that’s more financially feasible for people who might be unemployed, or whatever the reason they need coverage, and COBRA is too expensive for them,” he says.

 

Talib notes that even for those older, sicker participants, the changes could increase benefits while decreasing premium costs.

 

“Those individuals with the more comprehensive coverage, who might not be as healthy, will ultimately have to pay higher premiums under the ACA and so, part of what’s behind the executive order is that it does make some of the features of the ACA less tenable because it creates a higher risk pool for those individuals who would actually benefit from the comprehensive health care coverage, but would have to pay significantly higher premiums,” says Talib.

 

NEXT: Executive orders may decrease coverage to some

 

The increased usage of AHPs, along with STLDIs and HRAs, would undo several features of the ACA, most notably the individual mandate requirement heavily scrutinized by Trump throughout the election cycle and in the past year.

 

Yet, the proposed expansion of these smaller coverage plans in the American health care marketplace creates questions on whether sufficient coverage could be garnered from these changes, especially for patients with pre-existing conditions subject to losing health insurance.

 

“Associated health plans have had some issues in the past, and so it really depends on how it works,” says Steve Wojcik, vice president of public policy at the National Business Group on Health. “Sometimes they don’t really work out the way they’re planned, they either end up being too expensive or not having enough coverage to really be a big benefit, or have adverse selection issues.”

 

According to an annual health care study released by the Transamerica Center for Health Studies (TCHS), 57% of respondents do not believe the government should require an individual mandate. However, 19% reported that if the mandate were to be removed, they would like their employer to increase coverage. Additionally, 60% reported health care benefits come in second on the scale of importance after salary; 24% said they have had to leave a past job over a lack of health insurance; and 26% of employers in the survey reported the most common fear among employees is losing their health care due to a pre-existing condition.

 

NEXT: Expansion of HRAs adds options for small employers

 

Among the proposed increase of small plans is the rise of HRAs. Contrary to health savings accounts (HSAs), HRAs cannot currently be utilized for medical plan premiums, but instead can pay eligible HRA expenses including individual health insurance premiums. In the past, HRAs have had trouble in popularity compared to HSAs—average prevalence and enrollment rates for HRAs averaged at 10% in 2017, while HSA enrollment hovers at 17% and prevalence at 24.6%.

 

Under the executive orders, HRAs would be eligible to pay for medical plan premiums on non-group coverage, as well as be offered on a standalone basis.  

 

“HRAs are probably the most flexible of the types of health accounts that are available to employees with their health care expenses,” says Wojcik. “The HSA rules are pretty strict and they are tied to a specific health plan design. HRAs are not and they give the employer a lot more flexibility in terms of not just the type of plan that goes with it, but all other rules in terms of what happens with the HRA when an employee leaves.”

 

Under HRAs, when an employee is terminated or leaves the company, funds will remain with the employer. HSAs, on the other hand, move with the employee since the worker will own the account.

 

NEXT: End of CSR payments could increase employer plan premiums

 

Several hours after announcing and signing the executive orders, Trump revealed the decision to terminate cost-sharing reduction (CSR) payments under the Affordable Care Act, a system that offers coverage to millions of Americans.

 

“This is a big deal, not just for recipients of the subsidies but for everyone with health insurance,” said James A. Klein, president of the American Benefits Council, in a statement. “While the CSRs are designed to help stabilize the individual health insurance market, the absence of these payments could have cascading effects on the large group employer market that covers more than 178 million Americans.”

 

According to the American Benefits Council, “Employers rely on a healthy and viable individual health insurance marketplace, since an unstable market could result in further cost-shifting from health care providers to large employer plans. Additionally, erosion of the ACA exchanges would make individual market coverage a less viable option for part time workers, early retirees, and those who would otherwise elect to secure coverage through the individual market rather than sign up for, or remain on, COBRA.”

 

This absence of subsidies means health insurers would have to underride risk prudently, which could only result in higher premium rates, according to Pearce Weaver, senior vice president of Fidelity Benefits Consulting.

 

“Insurance companies, if they don’t have some levels of certainty on how they take on and manage risk, they may underride very conservatively, which would result in much higher premium rates,” he says. “So anything that the administration or Congress does to weaken the ACA and make things less certain for the health insurers creates volatility and the potential for significant price increases in the market.”

 

For now, employers can only adopt a wait-and-see approach as impacts of the executive orders and changes will roll out through 2018 and 2019, says Talib.

 

“In the meantime, we’re advising our clients that the ACA is still the law of the land at this point, so employers still need to make sure that they comply with the various features of the ACA as it stands,” he says. “At the end of the day, most employers are sitting tight right now, waiting for more guidance.”

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