New Mexico Governor Michelle Lujan Grisham in February signed House Bill 44, the New Mexico Work and Save Act.
Under the legislation, privately employed and self-employed workers who don’t have employer-based retirement accounts may be provided the ability to contribute into Roth individual retirement accounts (IRAs) in a savings program overseen by a state-appointed board. The law also establishes an online marketplace from which employers that want to offer their own plan can find and compare low-cost retirement savings options.
A summary published by members of Mercer’s Law & Policy Group points out that the law specifically exempts employers from fiduciary responsibilities under the savings program. In 2016, as states were proposing or beginning to implement their own retirement savings programs, the Department of Labor (DOL) issued regulations providing a safe harbor from Employee Retirement Income Security Act (ERISA) coverage to reduce the risk of ERISA pre-emption of the relevant state laws. However, in 2017, Congress passed, and President Donald Trump signed, resolutions to roll back the regulatory safe harbors created by the Obama administration. The DOL said those resolutions invalidated its rule.
Mercer notes that employer plans offered through the newly established marketplace, however, will generally be subject to ERISA. It also notes that participation in the work and save program is voluntary for both employers and employees.
The marketplace is a different approach from what most states have done to attempt to close the retirement plan coverage gap. Mercer points out that key features of the marketplace include:
It can offer an array of plans, including individual plans, multiple employer plans, 401(k)s and 403(b)s;
It will offer a financial literacy module for employers and employees;
Employers may use automatic enrollment and escalation as long as employees are able to opt out; and
Plans in the marketplace may, but are not required to, offer distribution options beyond lump-sums, such as systematic withdrawals, guaranteed lifetime withdrawal benefits and annuities.
The marketplace will begin operation by July 1, 2021, and the state-run auto-IRA program will be available for covered employees by January 1, 2022.
Partitions May Be the Union Pension Funding Crisis Solution
There is bipartisan support building around the idea of allowing the most stressed union pensions to enact “partitions” in order to remain solvent, but the real challenge is funding such a program.
Segal has published an updated study of the funded stats of the nation’s multiemployer union pension plans.
The survey results are based on actuarial certifications determined as of January 1, the beginning of the plan year. So they don’t reflect the effects of the COVID-19 crisis on financial markets and employment levels. However, as David Brenner, Segal’s national director of multiemployer consulting, tells PLANSPONSOR, the findings remain highly relevant and should be useful as industry analysts and policymakers debate possible responses to the longstanding union pension funding crisis as part of a broader economic relief package.
First and foremost, the data shows that union pensions entered the coronavirus downturn in a healthier state than they have been in for some time. More than 70% of plans reported a Pension Protection Act of 2006 (PPA) funded percentage of at least 80% or more. Impressively, the average market-value rate of return net of fees for the average calendar year plan was 17% last year. Thus, as of January 1, the average funded percentage based on the market value of assets was slightly higher than that based on the actuarial value of assets—89% compared with 87%.
On the other hand, the Segal data shows, 11% of plans are in critical and declining status, up from 10% last year. Positively, six plans moved from the red zone, or critical status, into the safer yellow or green zones, and six yellow-zone plans became green. Only one plan moved into a lower zone—from green to red.
“What we can say right now is that, before COVID, these plans ended 2019 at essentially a high-water mark,” Brenner says. “Many plans were healthy and were well-positioned. Of course, those plans that were challenged by not having the necessary employment base and the asset base, they were struggling before, and they are going to be challenged even more in this new environment.”
Defining the Challenge
Brenner says the union pension system is far from a monolithic entity facing one common fate.
“The health and future outlook of these union pension plans depends a lot on the specifics of the industry in which their participating employers operate,” he explains. “When you look at funding levels by industry, you see that many of those struggling are in transportation. On the other hand, plans populated by construction-focused employers are doing well.”
Case in point, Brenner cites one plan in the textiles manufacturing industry that has some 30,000 actively employed members, but which is being drawn on by more than 100,000 retirees and beneficiaries. Such plans clearly cannot survive the fact that their employers have moved overseas or exited the industry entirely. He says the health of plans also clearly varies by region.
“So, even though they are in a healthy industry from a national perspective, the ironworkers in Detroit and in Cleveland are struggling,” Brenner notes. “There is more hardship for those plans, as you would expect, based in parts of the country that didn’t fully rebound from the Great Recession.”
Defining a Solution
When it comes to potential solutions for the union pension funding crisis, Brenner supports the plan included in the fourth relief proposal published last week by Democrats in the House of Representatives. The plan calls for the creation of “special partition relief” for struggling multiemployer union pensions. It is detailed in a section of the proposed legislation referred to as the Emergency Pension Plan Relief Act, or “EPPRA.”
Under current law, the Pension Benefit Guaranty Corporation (PBGC) has limited authority to partition certain troubled multiemployer pension plans. In a partition, PBGC takes on the financial responsibility of some of the benefits of an eligible plan so the plan as a whole can stay solvent. In short, EPPRA creates a special partition program that would expand PBGC’s existing authority, increase the number of eligible plans and simplify the application process—thus allowing more troubled plans to obtain much-needed relief. Eligible plans would include plans in critical and declining status, plans with significant underfunding with more retirees than active workers, plans that have suspended benefits, and certain plans that have already become insolvent.
“I think partition as a potential solution to this crisis has solid overall support, both from Democrats and Republicans,” Brenner suggests. “What is hard is deciding how to actually get it done, and by that I mean, how do you fund it?”
Brenner says the answer to this question that was floated last year by several influential Republican senators is a non-starter.
“While they seem to support partition, the Republicans’ proposal for how to fund the program wasn’t really that serious, in my opinion,” Brenner says. “Their proposal essentially would rely on increasing insurance premiums for healthy plans and the creation of untenable surcharges for the unions and participating employers themselves. I believe a solution here must come from government, and that it should come from the government, which has allowed this problem to emerge through decades of deregulation and inaction.”
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