Compliance May 9, 2016

Expectations from Washington for Retirement Plans

Rich McHugh discusses proposals in Congress and regulator initiatives that will affect the retirement plan industry.
Reported by

Not much coming out of the most recent Congressional session has affected retirement plans, but that could change in upcoming sessions, according to Rich McHugh, of counsel at Porter Wright Morris & Arthur LLP and vice president of Washington Affairs at the Plan Sponsor Counsel of America (PSCA).

McHugh noted to attendees of the PSCA’s Annual Conference that the tax treatment of defined contribution (DC) plans escaped unharmed in the 2015 budget, but proposals are still being debated. President Obama’s proposed Fiscal 2017 Budget includes a cap on amounts that can be accumulated in retirement accounts. McHugh said the tax provisions in that proposed budget may be a blueprint for actions the retirement industry may see if a Democratic president is elected this year.

Want the latest retirement plan adviser news and insights? Sign up for PLANADVISER newsletters.

There are a couple of retirement plan proposals that have the potential for enactment, “maybe even this year,” according to McHugh. He said one is an electronic distribution bill to streamline rules about electronic disclosures to plan participants, and another is an action to make multiple employer plans a possibility for unrelated employers. When the Department of Labor (DOL) proposed rules for state-run plans, one suggestion was to allow for multiple employer plans, and some in the industry felt this created an unlevel playing field between states and the private sector.

Speaking of state-run plans, McHugh pointed out that the consideration that state-run plans could create different rules for different states, some in Congress are rethinking their opposition to federally mandated automatic individual retirement accounts (IRAs).

NEXT: Regulators have been busy

McHugh noted that retirement industry regulators have had more effect on retirement plans than Congress recently. Of course, the DOL’s fiduciary rule was big news.

But, he says the Internal Revenue Service’s (IRS’) elimination of its determination letter service is a bigger deal to plan sponsors than many think. He noted that determination letters are a big part of due diligence in mergers and acquisitions, and the PSCA has provided comments to the IRS encouraging it to continue the program in some form. Guidance issued in January that said expiration dates on determination letters issued prior to January 4, 2016, are no longer operative helps now, but eventually these letters will become stale.

McHugh also mentioned the Securities and Exchange Commission (SEC) rules for money market fund reform and liquidity requirements for mutual funds may affect plan sponsors’ investment decisions.

Finally, McHugh mentioned the Pension Benefit Guaranty Corporation’s (PBGC’s) recent focus on defined benefit (DB) plan practices for locating and paying terminated vested, participants. He said the agency may suggest that missing participants’ assets be moved to the PBGC until those participants are found and can make rollover elections.
Data & Research May 9, 2016

DC Industry Leader Warns Lawmakers Against ‘Snapshot’ Mentality

Franklin Templeton Investments’ DC business leader urges lawmakers and fellow industry pros to take a more holistic view of the U.S. retirement system—and to be thoughtful about planning major reforms. 
Reported by

Anyone who has worked for a significant length of time in the retirement planning industry is probably familiar with the risk of being distracted or even misled by overly simplistic “snapshots” of data.

Sitting down for a recent interview with PLANADVISER, Drew Carrington, senior vice president at Franklin Templeton Investments and leader of the firm’s defined contribution business (DC) within the U.S. institutional large market segment, explained how even the most knowledgeable DC industry experts now and again get bogged down by data.  

Want the latest retirement plan adviser news and insights? Sign up for PLANADVISER newsletters.

“Part of the issue is the sheer volume of data and commentary that is published every day in this industry,” Carrington says. Even if one just focuses on the widely known, established providers of financial industry research they already know and trust, there are easily dozens of new reports, articles and opinions being broadcasted every week. If one doesn’t dig deeper into the data and really take time to understand what they are reading, it can even seem like a lot of the research out there is outright contradictory, Carrington warns.

“This is what I mean by the risk of having a ‘snapshot’ mentality,” Carrington adds. “I have made the argument frequently in recent years that a lot of the snapshot data we see coming out of the retirement planning industry presents an overly simplistic and pessimistic view of what’s really going on with individuals’ retirement prospects.”

For example, he suggests a great number of reports are published year in and year out that rate retirement readiness according to the balance people carry in their current employer’s DC plan at a given instant of time. “Researchers do not take into account the fact that the individual may hold an individual retirement account (IRA), complemented by a pension from a previous employer, along with anticipated Social Security and potentially very significant home equity. And then there are the assets of the spouse or partner to consider, or even their children’s and parent’s assets.”

This is far from saying snapshot research has no value, Carrington adds. “This research begins to show us that there are still a lot of people that need to save a lot more than they currently are for retirement, but we should keep in mind that the real retirement readiness of a given set of people is not a conclusion you can easily draw from putting together one stand-alone report.”

NEXT: Accuracy matters as much as ever 

Apart from the simple interest in promoting accurate research, Carrington stressed that these issues “take on more importance every day in that lawmakers in practically every state are starting to take retirement system reform more seriously.” As they do so, “we need to make sure they have a good understanding of this very complex and multi-tiered retirement system we have in the U.S.”

Speaking specifically to state lawmakers, Carrington warned against just reading the headlines of reports and coming to the conclusion that massive changes need to be made overnight to the retirement system.

“When you dig deeper, what you find more often than not is that the retirement system is actually working quite well for a lot of people, especially those who have had consistent access to plans and who have a good understanding of things like rollovers and how to avoid leakage—people in plans with a lot of automation,” Carrington says. “Another way to say this is that the Pension Protection Act has been very successful and should be built upon moving forward.”

Taking all this together, Carrington says he’s actually pretty skeptical that the various state-driven efforts to create new ways for workers to access tax-advantaged savings will lead to a big boost in positive retirement outcomes.

“Those of us who have worked in this industry for a long time realize there are no silver bullets,” he warns. State lawmakers should take the time to consider how their programs will be impacted by things like job tenure, leakage, salary stagnation, novice investors’ behavioral tendencies, fees, etc.

“We know, for instance, that if a person doesn’t get past the $10,000 hurdle in their retirement account before it comes time to switch jobs again, they’re far likelier to just cash it out,” Carrington concludes. “Will these state-run plans be able to get people to save enough to really commit for the long term?  It’s going to take a while to get to $10,000 at a 3% auto-enroll with no auto-deferral escalation.” 

«