Familiar Retirement Reforms Still in Play
The 116th Congress begins with a blank slate as bills introduced in the 115th Congress have sunset with the transition. But lawmakers and Hill watchers may justifiably have a sense of déjà vu, as familiar retirement legislation has already been introduced in the brief period since the new Congress convened in January. Despite the U.S. House of Representatives flipping to Democratic control in November’s midterm elections, retirement reform remains an issue where significant bipartisan support is evident and clearly growing.
The Retirement Enhancement and Savings Act of 2019 (RESA 2019) is the latest version of a bill that has been introduced in Congress multiple times since 2016. But despite bipartisan support, the legislation has failed to advance.
RESA 2019, whose primary sponsors are Rep. Ron Kind (D-WI) and Mike Kelly (R-PA), would make many changes to the retirement savings landscape. These changes are primarily intended to encourage more employers to offer retirement plans and to encourage greater accumulation and preservation of savings in retirement plans and IRAs.
Several significant items included in the bill and intended to address the bill’s objectives are described below.
Pooled Employer Plans—a Way to Encourage Offering Workplace Saving Options?
More than one-third of Americans have no access to an employer-sponsored retirement plan. Cost, administrative responsibility, and potential fiduciary liability are the obstacles often cited among employers—especially small to mid-size employers—that are considering establishing a plan. One proposed remedy in RESA 2019 is enhancement of the multiple employer plan (MEP) option. MEP arrangements allow many employers to participate in a commonly-administered plan, with the flexibility to tailor provisions to their respective needs. Proponents hope this will yield economies of scale that lead to reduced cost, greater sharing of administrative burden, and reduced fiduciary liability for participating employers.
Past regulatory restrictions have required MEP-participating employers to have a commonality among them (e.g., common ownership, business purpose, etc.). This has greatly limited the use of the MEP concept. Among other MEP enhancements, RESA would permit “open MEPs” by creating “pooled employer plans” (PEPs). PEPs would be exempt from the commonality requirement and would be required to specify a “pooled plan provider” that is the plan’s named fiduciary and plan administrator. This could result in more employers offering a retirement plan to their employees.
Lifetime Income Investments—a Solution to Outliving Retirement Savings?
In addition to the issue of workers having no workplace retirement plan, there is great concern that the savings of many workers will not be enough to support them through their retirement years. An often-proposed solution is greater use of so-called “lifetime income investments,” which can be used to transform accumulated savings into an income stream throughout retirees’ lives. Such investments, when paid out in retirement, can resemble a payment stream from a defined benefit pension plan. Lifetime income investments have seen limited use in the past. A major obstacle to their use has been retirement plan sponsors’ concern over potential fiduciary liability for the soundness of the lifetime income provider.
RESA 2019’s sponsors hope to address employers’ fear of fiduciary liability. The bill would require an annual statement that projects potential lifetime income payments using a participant’s actual accumulation, in the hope of stimulating increased saving and increased use of lifetime income products to provide a secure retirement. The legislation also offers a new fiduciary safe harbor to encourage more employers to offer these investments in their plans.
Will Tax Incentives Motivate Employers and Savers?
RESA 2019 contains several tax incentives for establishing retirement plans and for workers to save more. The maximum tax credit for small employers establishing a plan would be 10 times greater. A new credit for implementing automatic enrollment of employees would be created. All workers—or those whose spouses have earned income—would be eligible to make Traditional IRA contributions beyond age 70½.
Proposal to Eliminate Life Expectancy Payments to Nonspouse Beneficiaries Remains
While RESA’s provisions generally have been welcomed, one that is particularly complex would require most nonspouse beneficiaries of IRA and employer plan accounts to distribute them and pay any taxes owed within five years, for aggregate balances that exceed $450,000. Lesser amounts could be distributed and taxed over a beneficiary’s lifetime. This provision is included in RESA 2019—as it has been in other legislation—to raise tax revenue in order to offset various incentives and enhancements the bill contains.
RESA 2019 contains many more provisions that address a host of retirement saving issues. Some would offer greater latitude in when employer plans can be established and plan design changes made. Others would address the insolvency of the insurance program for defined benefit pension plans, limit pre-retirement leakage from plans, and make it easier to successfully terminate 403(b) plans.
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