Regulations, Legislation Impede Retirement Savings of Americans

The U.S. House Education and the Workforce Committee’s Subcommittee on Health, Employment, Education and Pensions (HELP) held a hearing about regulatory barriers facing workers and families saving for retirement.

In his testimony, Bradford P. Campbell, Esq., Employee Retirement Income Security Act (ERISA) attorney and former U.S. Assistant Secretary of Labor For Employee Benefits, notes that the concept behind the Department of Labor’s (DOL)’s fiduciary rule—ensuring retirement savers receive quality retirement advice and assistance—is a good one.  However, he claims the rule executes this concept very poorly.  “Rather than focusing on specific problems, the fiduciary rule fundamentally disrupts the way advice and assistance is provided,” he said.                   

He explains that the basic problem is that the fiduciary rule equates the way an adviser is compensated with the quality of the advice, deeming certain compensation methods to be prohibited despite their extensive oversight by existing Federal, state and other regulatory and enforcement agencies.  “Under this structure, your financial professional might even be prohibited from making a recommendation that is in your best interest, simply because she receives a commission,” he noted. 

According to Campbell, advisers and financial institutions reported increasing minimum asset requirements for advisory accounts, a shift from commission-based accounts to more expensive fee-based accounts, reduced investment product offerings, increased litigation risks and compliance costs, and increased liability insurance costs. He cited an Investment Company Institute survey of its members (mutual fund providers) that showed an increase in the number of “orphan” accounts—shareholders who are no longer working with an adviser—as broker/dealers and other distribution partners began implementing plans to stop serving small clients. The average account balance in that survey was $17,138, “representing the loss of advice and assistance to the very retirement savers the Rule should be protecting, and who are most in need of assistance,” Campbell said.

He also cited a Vanguard study that showed individuals receiving professional investment assistance have as much as a 150 basis point increase in compound returns, due in large measure to the encouragement they receive to contribute more to retirement savings and to make other changes to their financial habits. “This highlights the fact that working with a professional is about more than picking investments—it is about a relationship that includes education and other financial assistance, no matter how the professional is paid,” Campbell said. 

Campbell additionally noted that the cumulative effect of decades of regulation and legislation has increased the burden on employers sponsoring retirement plans, making it more difficult—especially for small employers—to offer retirement plans to their workers.  He contends that Congress and Federal regulators could remove some of these burdens without sacrificing worker protections, improving regulatory efficiency.  For example, multiple employer plans (MEPs) would make it easier for small businesses to offer well-run plans with a centralized, professional compliance team, eliminating the need to “recreate the wheel” at each plan sponsor, he said.

In addition, he noted that the DOL could review and harmonize the various disclosure and reporting requirements that are not currently well-coordinated, resulting in a nearly constant need for plan activity related to different events and deadlines. The DOL could also permit default electronic disclosures, saving a significant amount of time, money and paper.

James M. Kais, senior vice president and managing director, Retirement Practice, Transamerica, reiterated the thoughts brought up by Campbell about the fiduciary rule and open MEPs.

However, he said, “In seeking solutions, we must take care to ‘do no harm’ to the current system and incentives for saving. In addition, he suggested that care should be taken to ensure that any new requirements that Congress or the Administration imposes upon open MEPs as part of their approval do not also apply to the current law MEPs (closed MEPs) structure. “To do so would be to disrupt the closed MEP marketplace,” Kais said.

Jason Furman, senior fellow, Peterson Institute for International Economics, noted that in the Pension Protection Act of 2006 (PPA), Congress took important steps to enable companies to establish auto-enrollment for their employees, with appropriate protections under ERISA. “This welcome trend, however, is of little benefit to the roughly one-third of Americans who have no access to a retirement savings plan through their employers,” he said.

According to Furman, in 2006, the Brookings Institution and the Heritage Foundation teamed up to develop a proposal for these households that would require firms to establish an automatic IRA for their employees that would default employees into retirement savings while giving them the choice to opt out. Under the plan, small businesses would get a tax credit to cover the relatively minimal administrative costs associated with running the system. “Federal legislation on automatic IRAs would be welcome,” he says.

Furman further noted that in the absence of Federal legislation, a number of States have enacted laws to establish such plans. However, state payroll deduction savings programs could plausibly be read as requiring employers to create ERISA plans, since they would be mandated to automatically enroll employees and deduct from payrolls to send on to the plan.

Furman pointed out that to remove this impediment, the DOL proposed and finalized a rule creating a “safe harbor” from ERISA preemption for State payroll deduction savings programs that meet a number of criteria. However, President Trump has passed legislation rescinding the DOL’s final rule. “This legislation will chill State experimentation in this critical area, increase uncertainty, and impede an effort that would have increased retirement security for a large number of Americans,” he said.

Furman also contended that perhaps the most consequential policy issue for retirement savers that this Congress has considered this year is the American Health Care Act (AHCA). “The Congressional Budget Office (CBO) estimated that the version of AHCA originally introduced in the House would result in 24 million people losing health insurance due to a combination of regulatory changes. Moreover, the CBO has documented that the legislation would result in increases in out-of-pocket costs for many households—particularly for older households and for those with lower incomes,” he said.

He continued: “The net effect of this legislation would be to reduce effective after-tax incomes for tens of millions of households, increasing their financial insecurity and causing them to cut back on a wide range of activities—including retirement savings. As such, this legislation has the potential to increase retirement insecurity along with its other costs in terms of worse health outcomes and greater financial insecurity.”

Erik Sossa, vice president, Global Benefits & Wellness, PepsiCo, Inc., representing the ERISA Industry Committee (ERIC), noted several other ways regulators could help retirement plan sponsors and participants.

“Congress should look to eliminate unnecessarily burdensome rules that divert funds from employees’ retirement benefits,” he said.

He gave examples where Congress can take action to facilitate the efficient and effective delivery of high-quality benefits to millions of employees and their dependents and beneficiaries:

• Modernizing and harmonizing rules governing electronic communications with participants in employee benefit plans;
• Permitting employers to locate so-called “missing” participants using cost-efficient measures and without incurring ongoing costs and increased liabilities for participants who they cannot find despite reasonable efforts; and
• Confirming that employers that sponsor ERISA-governed retirement plans are not also subject to State law regulations or requirements regarding State-mandated retirement plans.

“To address costs and complexities, which may not be readily apparent to those outside of the plan-sponsor community, ERIC urges the Committee to do all it can the ensure that plan sponsor views on new regulations and legislation are solicited in advance and seriously considered,” Sossa concluded.