An Update on Legislation Affecting US Retirement Plans and Policy

With only about 30 legislative days left in 2019, and despite bipartisan support, opportunities to enact the Setting Every Community Up for Retirement Security (SECURE) Act are becoming increasingly limited.

    Drew Carrington, CFA, CAIA

    Drew Carrington, CFA, CAIA Senior Vice President, Head of Institutional Defined Contribution

    It's been a full year since President Trump issued an executive order on retirement security. Now Congress is back from its August recess and we have less than four months left in 2019. In our latest podcast, Drew Carrington, Head of Institutional Defined Contribution at Franklin Templeton, and Michael Hadley, a partner with law firm Davis and Harman, share an update on the legislative and regulatory landscape affecting US retirement plans and policy.

    Key Takeaways:

    • With only about 30 legislative days left in 2019, and despite bipartisan support, opportunities to enact the Setting Every Community Up for Retirement Security (SECURE) Act are becoming increasingly limited.
    • With passage of the SECURE Act this year far from certain, the goal of also enacting some form of “Retirement 2.0” legislation in 2019 has now shifted to 2020 or beyond.
    • While we wait to see if Congress can move anything forward on the legislative side, it’s important to keep an eye on a number of regulatory projects expected to move forward this fall, including several from the Department of Labor (DOL).
    • As indicated by the flurry of activity on the topic, there is a strong desire amongst policymakers to expand access to the retirement system across the workforce through a truly multiple employer plan (MEP).

    Podcast Transcript:

    Heather Rosen: Hello, I'm Heather Rosen with Franklin Templeton. Today we're going to be talking about the latest on what's going on in Washington and the retirement landscape. With me I have Michael Hadley, partner at the law firm, Davis and Harman [Davis & Harman LLP] in Washington, DC and Drew Carrington, Head of Institutional Defined Contribution at Franklin Templeton. It's been a full year since President Trump issued an executive order on retirement security. Now Congress is back from its August recess and we have less than four months left in 2019. So, let's start off with a major piece of proposed legislation, which passed the House in May, the Secure Act or Setting Every Community Up for Retirement Enhancement. Many were optimistic it could quickly progress through the Senate in some form. And given the timing I just mentioned, what are the prospects for the Secure Act or something like it actually crossing the finish line in the coming months?

    Michael Hadley: Well, it's interesting question because the last time I was actually in your offices to record a podcast do and I were talking about the Secure Act and the fact that it largely stalled in the Senate, because of the objections of just a few senators. We were stuck in neutral and now it's been a couple months and guess what? We're still stuck in neutral. Those objections from those few senators remain and at this point the leadership in the House and Senate is not willing either to bring it to the floor for a vote, nor willing to add it to a larger piece of legislation. In fact, the, the Senate and the House are working on a must-pass piece of legislation right now, a continuing resolution to keep the government open past September 30th that CR [Continuing Resolution] has passed the House and is pending in the Senate. I expect to be passed here in the next couple of days before the Senate and house go on recess and it is what we call a clean CR, meaning it doesn't have a lot of things attached to it and most importantly for our purposes, does not have the Secure Act.

    Michael Hadley: So even though the Secure Act, which has a number of bipartisan vetted proposals for , for the retirement system and has passed the House overwhelmingly at this point, we're largely stuck. So, we only have about 30 legislative days left in 2019. While the rest of us think of it as a whole quarter, the actual number of days left when the House and Senate are both in session before the end of the year is only about 30. That leaves very few prospects, probably the next chance to pass the Secure Act, or some other piece of tax legislation, will be when this current CR expires and that would be a November 21st. At that point, Congress would either need to do another CR to keep the government open or it might actually pass a budget with specific appropriations bills. And that could be an opportunity to add the Secure Act, but only if the House and Senate leadership are willing to do that. Right now things have devolved a little bit in Washington. So I, I think chances are shrinking at this point to see the Secure Act pass this year. Doesn't mean it's not important to watch, it is important to watch because at some point we expect some or all of the provisions to make it into law.

    Heather Rosen: And despite those shrinking chances, Mike, what are the implications of what, what will be a quick effective date for employers, consultant, record-keepers in the industry on Secure?

    Michael Hadley: As we talked about in the last time we were together, many of the provisions of the Secure Act kick in as early as January 1, 2020. That includes some of the changes to the rules for required minim distributions [RMDs]. Moving forward, the age at which folks have to start taking money out of their IRA or plan, as well as the changes to the rules that apply after somebody dies, by forcing many beneficiaries of IRAs and plans to take the money out of the account within 10 years. That's sometimes called the stretch provision. That also kicks in, in 2020. For 401(k) plans, a provision that would kick in almost immediately is a provision allowing withdrawals from plans in connection with it, a birth or adoption of a child. A plan administrator is going to have to decide whether to offer that and what the reporting and withholding obligations are in connection with those withdrawals.

    Michael Hadley:  It is possible that Congress could change the effective date, push things out a little bit. but in my view, the most likely thing that would happen is the Secure Act it's added at the very last minute to something, and there is no time to change to think about those effective dates and make changes. So folks that are prepare for these sorts of legislative changes need to be at least aware of the possibility that we might need to scramble quite a bit.

    Heather Rosen: Drew, what about lifetime income? It's insecure, but it doesn't show up in any of the other proposals that are out there right now. With plan sponsors thinking about income and looking for this guidance, what are recordkeepers, advisors, employers likely to do about lifetime income if Secure doesn't happen?

    Drew Carrington: Yeah, it's a great question. The, the Secure Act has as part of it, in addition to the features that Mike already mentioned, it also has the, the open multiple employer plan language and then, two important features that address lifetime income in qualified plans. So one is a lifetime income disclosure mandate, where plan sponsors would be required to tell participants, the monthly income amount based on the current value of their account. and, but the, perhaps more importantly, the Secure Act includes a safe harbor around annuity selection. Many plan sponsors have been reluctant to add guaranteed or lifetime income options to their plan because they're concerned about their fiduciary responsibility around the selection of a one or more lifetime income providers. And the Secure Act creates a, a very broad safe harbor around that. The question will be, because plan sponsors are increasingly interested in this topic of retirement income.

    Drew Carrington: How do I serve participants who are nearing or in retirement in that, phase where they're thinking about distributions? can I offer investment options or, lifetime income options in the plan to serve that population? And many of them have been very interested in the language, the, the safe harbor language that's insecure. The question will be whether they continue to move forward addressing the, the demographic changes, the needs of their own participants , in the absence of the final passage of Secure. Will they move forward in the view that we'll eventually get, some or all of Secure passed and whether it's in Secure or some other legislative package. And whether it's in 2019 or 2020, will they move forward now or will they continue to tap the brakes and wait for the final language? I think the irony is there's already a safe harbor, the DOL [Department of Labor] issued a safe harbor several years ago,for the selection of lifetime income providers.

    Drew Carrington: Many plans sponsors feel like that safe harbor isn't safe enough and we're looking for, I guess the phrase would be a safer harbor. But, the there is, they could move forward now, some plan sponsors likely will, many plan sponsors and their advisers will likely wait to implement, particularly guaranteed income solutions, until we see the final language, passed into law. again, whether it's part of Secure or some other legislative package.

    Heather Rosen: Let’s shift to the regulatory side, where there's actually a great deal going on that could have far reaching implications for the retirement landscape. Mike, first, would you mind spending a few minutes on that final Association Retirement Plan [ARP] regs [regulations], which were finalized in late July?

    Michael Hadley: Sure, happy to. As you mentioned the beginning, Heather, there was an executive order issued by President Trump in August of last year. One of the things the executive order directed the Department of Labor to do was explore the issue of multiple employer plans, or MEPs, and that ultimately led to a proposal to create a new type of plan structure, building on existing MEP rules that the Department of Labor calls the Association Retirement Plan or ARP. An Association Retirement Plan is a MEP, in the sense that it allows employers that are not in the same control group to join a single plan, but it is not a truly Open MEP, because it doesn't allow any employer located at any part of the country to join a single plan.

    Michael Hadley:It has a number of restrictions not contained in the Secure Act, the Secure Act’s Open MEP provision. For example, financial institutions cannot sponsor one of these things. The employers have to have some commonality among them—it could be in the same trade or line of business or in the same geographic area—and there are other restrictions on the entity that that's actually the sponsoring entity. So while ARP is viewed as a way to possibly expand coverage a little bit, it does so largely marginally.

    Michael Hadley: We think that the, the market will start to respond to Association Retirement Plans. We've already heard about folks trying to take advantage of that as, as it rolls out. But it's important to understand that, that Association Retirement Plan or, or ARP rule is not truly Open MEPs. it's only a, a baby step along the way.

    Drew Carrington:  It's worth noting, Mike, though there's one thing in the, in the ARP language that that actually goes further than the language in the Secure Act and that has to do with self-employed individuals. So the DOL, actually wrote language in, ARP proposal, the final rule, that says that a self-employed individual could join an Association Retirement Plan and effectively be both the employer and the employee for the purposes of joining the plan. And that differs a little bit from the language of that’s in Secure.

    Heather Rosen: So continuing on this topic of multiple employer plans in late July, DOL issued an RFI [Request for Information] on Open MEPs. We are in the comment period now. What are the implications of the finalized ARP regs that you just went through, versus Open MEP provision and Secure and the RFI. How should we be thinking about this concept of multiple employer plans across all of these things?

    Michael Hadley: So most of the comments that the Department of Labor received on its arp proposal association retirement plan proposal, most of them said, Hey, you need to expand this. And actually many of them said, we think you can do that without a change in the law. And the Department of Labor in its final rule largely stuck to what it had proposed. It didn't expand things at all. Instead, the Department of Labor said, you know what, we'd like to get more information about this idea of an open multiple employer plan.

    Michael Hadley: And they recognize just like the rest of us do, that passing a change in the law after the Secure Act, while we think there's a good chance it would happen, it's, it's far from assured. And so, the Department of Labor is seeking comment not only on their ability to do that on their own without a change in law, but also ideas on what that might look like. And in particular there they ask a lot of questions in this request for information, about the, the extent to which financial services providers should be allowed to offer some sort of a MEP. And if so, how might we deal with some of the conflicts of interests that may come up in connection with a financial services provider being the MEP sponsor as well as the fiduciary. I think it's too early to tell whether or not the Department of Labor is going to move forward with that sort of an additional regulation.

    Michael Hadley: But it is pretty clear that they would like to get more information and would like to have more of an open comment period at which, as you say, is open right now closing at the end of, of October.

    Drew Carrington: Yeah. Heather, I think it's worth mentioning here to whether you talk about what's going on in Secure or you talk about the, you know, adding permanent part-time employees or , ARPs or the RFI for Open MEPS from the DOL, there's a clear trend toward expanding access to the retirement system across the workforce. So small businesses, gig workers, part-time workers, the employees of professional employer organizations. There's a clear trend to we're trying to expand the availability of workplace savings to a broader swath of the workforce. And, in ways that may change how we've traditionally thought about the, the linkage between the employer sponsoring the plan and the plan itself. So, I I'm not sure what, what ends up happening, whether it's Secure or some version of Secure or an expanded version of the DOL’s, ARP language. But what is clear is that in Washington today, there is a very clear push to expand access to the retirement system for all working Americans.

    Heather Rosen: And how does the ‘One Bad Apple’ relief that has been submitted by the Treasury Department and IRS fit into this multiple employer plan conversation in Washington's desire, you know to get more employees covered.

    Michael Hadley: The attention on multiple employer plans or MEPs has brought to the surface a whole series of issues about them and one of the issues that we've been working on here in Washington is how to make MEPs more effective. The whole idea behind a MEP is that unrelated and typically smaller employers are joining together into a central plan that's administered centrally by a trade association or some other entity. And one issue that actually comes up quite a bit is that one of those employers might do something that would potentially cause the disqualification of the plan for tax purposes. The IRS has traditionally taken the view that if you've got to MEP, the failure of any one employer to satisfy all the various tax qualification rules, disqualifies the whole plan. Hence the term ‘One Bad Apple’ and that August executive order from last year told the Treasury Department, “Hey, take a look at that and see if you can provide some relief.”

    Michael Hadley: The Treasury and IRS then put out a proposal and comments are ending very soon here on that. That would allow a MEP to take an employer that's either done something that it shouldn't have done or more commonly just gone unresponsive and to take that employer's portion of the plan and spin it off creating a separate plan, which could then be terminated and the employees paid out and rollovers to IRAs. The idea here is to sort of think through what are some of the implications for bringing in smaller businesses into these arrangements, particularly ones that have no experience in retirement plans, may not exist for a long time, and could create a various whole set of issues. And this ‘One Bad Apple’ proposal is an attempt to give the administrator of a MEP an additional tool to deal with those situations, which will inevitably come up. Because it was in the President's executive order, I fully expect that Treasury and IRS will finalize that regulation relatively soon after the comment period closes.

    Drew Carrington: The other thing that it will do is it will give small employers a lot more comfort about joining—whether it's an ARP or a MEP—because they're not worried about, “Now I'm on the hook, I could potentially have my retirement savings disqualified because of the, the, the actions or, inaction of some other, employer who's part of this overall program.” That has been a significant hurdle for, for many small businesses to say, you know, that this sounds like a good idea, but I don't want to be on the hook for, what this guy down the street did or didn't do.

    Heather Rosen: Let's switch to the DOL’s work on the fiduciary rule. When might we expect to see something and how should we think about this versus the SEC’s [Securities and Exchange Commission] Regulation Best Interest [Reg BI]?

    Michael Hadley: The Department of Labor has told us that they expect to release a reread proposal related to the fiduciary rule by the end of the year. And we have heard that that that rule is well long and could go to the White House's Office of Management and Budget for its typical review. It could be sent over there very soon and that sort of in line with the review period you typically see at the White House. We don't know what's in it and I will not predict, but we will, we are able to sort of report what the Department of Labor and other officials have said publicly and that's that it is going to be harmonized, aligned with the SEC’s proposal.

    Michael Hadley: Now the SEC, as everyone knows, finalized, it's Reg BI. Reg BI is now under a lawsuit from, a number of states, plus the District of Columbia that could call it into question depending on how that litigation proceeds. But we do expect, that the Department of Labor is going to continue to move forward with its reread proposal. And we will be looking for things like: the extent to which it covers IRAs, the extent to which it covers rollovers, how it addresses folks that sort of stepped into fiduciary status because of the Obama administration fiduciary rule, and if there's any transition relief for them, as well as who it covers. The important difference between the Department of Labor's jurisdiction and the SEC—Reg BI focuses almost entirely on those folks that are acting as broker dealers or associated persons of a broker dealer, whereas the Department of Labor's rule, ERISA in particular, can sweep in anybody who earns any type of money and who provides whatever the Department of Labor defines it as investment advice. So, in a sense it covers a lot a larger number of people. Of course, the Department of Labor only has jurisdiction over employment-based plans as well as to a lesser extent, IRAs.

    Heather Rosen: So continuing on the regulatory front in August, the president ordered Treasury to examine the life expectancy and distribution period tables, RMD [Required Minim Distribution] tables, for the required minim distributions. Where is Treasury on that and what impact might a change have on the way people are thinking about taking distributions from their retirement accounts?

    Michael Hadley: So that proposed regulation and it does need to actually go through the formal notice and comment process. It's at the White House's Office of Management and Budget for review. I would expect to see it in proposed form, published for comment within the next couple of weeks to a month. And what is it going to do? It basically is going to change the amount that you have to take out of your IRA or plan after you reach 70.5. Under current law, you, once you reach 70.5, you have to start taking money out and the amount you have to take out is based on a percentage. That percentage you go and you look at IRS tables and it tells you based on your life expectancy at this point, here's the denominator that you need to use for your, for your distribution. That those life tables have not been updated in a number of years despite changes in life expectancy.

    Michael Hadley: And so, the, the new proposal will provide a new tables. Now while it’ll impact basically anybody who has an IRA—at least once they reach their RMD age. Again, because this is part of the president's executive order of August of last year. I think Treasury and IRS are going to move forward with a final regulation, as quickly as they're able to so.

    Drew Carrington:Yeah I think it's an important point and one that goes kind of underemphasized in, in our industry. Individuals use the required minim distribution tables, the what their actual requirement or distribution is, whether it's from their IRA or their 401(k) plan, as an important indicator. Most individuals with balances in tax qualified plans, 401(k)s or IRAs, only take the required minim distribution. And actually many individuals wait until they reach 70.5 to make withdrawals from their qualified monies, and then, and then only take the RMD. So, because that's an important signal and important cue, it will likely change behavior for many individuals.

    Drew Carrington: It's also worth mentioning, that the Secure Act also changes the date at which, or the age at which RMDs kick in, so, pushing it from 70.5 to 72. And actually there's another piece of legislation, that not only pushes it out to 72, but then indexes the inception date to future changes in longevity.

    Heather Rosen: Great. So are there any other regulatory projects that you think we should be keeping an eye on?

    Michael Hadley: The other thing that is currently pending, yesterday comments closed on a Request for Information called the Concept Release that the SEC put out, that they described as Harmonization of Securities Exemptions. But what they're really asking is, there are all these rules that allow some investors to access non-registered securities, different parts of the capital markets, but they don't allow other investors to do it. So, very just at a very high level, retail investors, sort of individuals, non-wealthy individuals do not have the ability to buy into types of investments whether they're alternative, whether they're small businesses, that sort of thing. Historically, they've not been able to do that because of an assumption that only institutional investors and, and very high net worth folks, have the sophistication to buy and disprove alternative assets.

    Michael Hadley: And the SEC released a whole series of questions that they're asking about all these rules and what the SEC should do to make investments available to, to more folks. Now, I won't go through all the questions, but at a high level, what SEC Chairman, Jay Clayton has said he's trying to do is look at ways in which he can bring main street investors to more parts of the capital markets. And clearly, he's also looking at that within the retirement market because most people's investing experience is actually not in buying individual securities but investing through their 401(k). At a high level, that's kind of what he'd like the SEC to explore. Are there ways in which they can change some of those exemptions, open them up a little bit more so that the capital markets are, are in a sense open to more folks?

    Drew Carrington: The SEC proposal on alternative investments is quite interesting. What's interesting about it is the framing of this notion of democratization. If you, if you look at the sort of the income scale, people in the lower half of the income scale, the bulk of their wealth is home equity and retirement plans. And they are currently, because of the way the rules are written, largely prohibited from participating in an increasingly large portion of the overall capital markets in the US and the, the framing here is that, that's a fairness question.

    Drew Carrington: Is it fair that we're limiting access to these, these higher returning investments that are available to endowments or foundations or rich individuals and we're prohibiting, the average main street investor from accessing those investments. So, that’s a different, that's a new way of, of having this discussion. You know, a number of us in the industry have talked about the, you know, the potential investment enhancement that's available from investing in illiquids or alternatives , you know, things like private equity or venture capital, as well as other types of, you know, more traditional investments, private real estate like office buildings and, shopping centers and apartment complexes. Those are normal parts of institutional investment portfolios. Again, historically haven't been part of the retirement plan landscape in many, in many instances because of the rules regarding you have to be a qualified investor, sophisticated investor, you have to have a certain net worth or a certain income.

    Drew Carrington: Those rules in today's, environment look a sort of increasingly unfair or, outdated. And in this, this positioning of the discussion about access to those investments as a fairness question, is really, that's a new way to have this debate. And, I think that may change behavior. In particular, 401(k) plans are uniquely qualified to enable access to some of these investments.

    Heather Rosen: So where we are in the year and with Secure call it somewhat stalled. What, what are the prospects for other retirement legislation that's out there? You know, and is there anything that that actually could progress more quickly?

    Michael Hadley:I've got to say they're not good. I was just talking with a senior member of the Senate Finance Committee, who is in a position to actually move some of this stuff and even he said, look, we need to get the Secure clear, resolve that one way or the other, because there's lots of other ideas in the queue—including ideas from folks like, Senator Portman [United States Senator Rob Portman] and Senator Cardin [United States Senator Ben Cardin] and on the House side from the Chairman of the Ways and Means Committee, Richie, Richie Neil [United States Congressman Richard E. Neal] lots of ideas that would like to get their a day in court if you will. But until Secure Act is resolved one way or the other, it's going to be hard for those to kind of get the attention they deserve. And there's one exception, there is actually provision in the Secure Act that deals with an issue that is really time sensitive.

    Michael Hadley: There's a provision that helps with a situation where a defined benefit plan has been frozen or at least frozen as to new employees going in. But because of the nondiscrimination rules, increasingly it’s bumping up against the rules because people who were once low paid are becoming high paid. And the plan is bumping up against the internal revenue codes, non-discrimination rules, which forces the employer basically to freeze all benefits. Nobody gets anything. And that problem could result in hundreds of thousands of people each year having their benefits frozen, no new accruals. There's a separate bill that has been introduced to deal with just that issue. It's possible that that gets some attention outside of Secure. But other than that, I really don't see there's any retirement legislation that's likely to get attention at least in 2019. Maybe in 2020, there could be some hearings, et cetera. But it's important to remember that once we get into 2020, you have a limited amount of time before we basically are in the election season and it's hard to get bipartisanship.

    Heather Rosen: Mike, this Scalia conformation happened really quickly. can you tell us a little bit about that please?

    Michael Hadley: Sure., Eugene Scalia has been confirmed now as the secretary of labor replacing, secretary Acosta who resigned in July of this year. Scalia's name is probably known to folks, not just because he's the son of the late Supreme court justice, but also, because he was the lead litigator in the litigation that ultimately struck down the department of labor's fiduciary rule. He was confirmed in a party line vote, both in committee and on the floor of the Senate and was sworn in on September 30th. Probably the big question on a lot of folks minds are, you know, what, what is his new leadership role? What effect is that going to have on the upcoming fiduciary rule Re re proposal or better said the reread proposal? Given Scalia's significant experience in litigating with respect to the, the old Obama administration fiduciary rule.

    Michael Hadley: He actually got a question about that in his confirmation hearings. And he basically said, as to whether or not he's going to recuse himself, he's going to look to the guidance from the department of labor's ethics office to figure out what he would need to do in terms of recusal, which is essentially saying, I haven't decided yet. Scalia is probably has more experience in a risk side and in retirement policy than pretty much any secretary of labor we've seen in, at least in, in my experience. So even if he's ultimately doesn't participate in the, the fiduciary rule itself, given his experience with employment, labor issues, we expect that he'll have a significant impact on, on issues that matter to retirement savers. The other thing that’s happened, is that the agency within the DOL that administers Arista, so therefore is the main regulator of fiduciaries and plan sponsors, is restructuring in a way that is more than a shuffling of the deck. It shoes the growing importance of these regional offices and the impact they have on retirement policy.

    Heather Rosen: Mike, Drew, lots to keep an eye on, that could really have a huge impact on retirement policy. As always, thank you both for your time, expertise, and insight.