Data & Research November 8, 2017

Mercer Offers Retirement System Policy Proposals

In a point-of-view white paper, Mercer offers several specific policy recommendations to address what should be done to enable more Americans to retire with confidence.
Reported by

Working with the World Economic Forum, Mercer has estimated the long-term savings gap in the U.S. at $27.8 trillion at the end of 2015, and it says longer life spans will cause that number to grow significantly. In addition, widespread lack of financial knowledge—coupled with a continued inability to save and limited access to workplace plans or other effective savings vehicles—could cause the gap to reach $137 trillion by 2050.

In a point-of-view white paper, Mercer offers several specific policy recommendations to address what should be done now to enable more Americans to retire with confidence:

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

  • Support retirement security through tax policy;
  • Improve access to retirement plans for more Americans facilitated through the workplace;
  • Build on the success of the private retirement system; and
  • Remove impediments to employers maintaining defined benefit (DB) plans.

Mercer contends that strong participation rates in 401(k) plans show they are an effective means to encourage savings. It urges policymakers not to exacerbate the already-significant savings gap in America and risk the progress employers have made in encouraging their employees to save by disrupting the current tax treatment of 401(k) contributions. The recently released tax reform bill indicates Congress is not considering doing so.

As Congress considers retirement issues, Mercer says it’s critical to focus on policies that will help expand plan coverage and help individuals and employers generate more savings and retirement income. The research says one of the most promising ways to address this challenge is to remove current barriers to creating “open” defined contribution (DC) multiple-employer plans (MEPs) by private-sector organizations. Open MEPs would be freed from the current requirement that participating employers have common ownership or a common business purpose.

Mercer notes that automatic payroll deduction IRA plans also hold promise as a way to expand plan coverage, and a number of states are moving to offer these arrangements to private-sector workers. However, it believes the potential patchwork of inconsistent state-run programs may create obstacles for employers with operations in more than one state. The white paper says employer-based plans offer significant advantages to IRAs in the form of substantially higher contribution limits, the possibility of employer matching contributions, generally lower costs and the Employee Retirement Income Security Act’s (ERISA)’s participant protections.

NEXT: Strengthening the current employer-based retirement plan system

To strengthen the current system of employer-based plans, Mercer suggests policymakers encourage greater access to lifetime income products. Mercer says a clear safe harbor from liability for selecting an annuity provider would facilitate this, as the current Department of Labor (DOL) guidance with respect to annuity selection from a DC plan is too vague to be helpful to plan sponsors. Facilitating the portability of lifetime income options, which will permit participants to preserve their lifetime income investments and avoid surrender charges and fees, would also be helpful.

Mercer also suggests an alternative automatic enrollment/escalation 401(k) safe harbor plan should be created with higher default deferral rates. Unlike the current automatic enrollment safe harbors, which require an initial participant deferral rate of 3%, the new safe harbor plan’s initial deferral rate should be 6% and escalate to 10% in subsequent years. The design would also allow employers to match employee contributions up to 10% of pay.

A not-for-profit industry clearinghouse, similar to the Depository Trust Clearinghouse Corporation, could facilitate the automated transfer of assets from plan to plan or from plans to individual accounts and vice-versa, Mercer says. This new clearinghouse would help reduce leakage associated with low-balance individuals cashing out their savings when changing jobs, would help individuals better consolidate and manage their retirement benefits, and would reduce instances of “lost benefits.”

The paper points out that short-term and emergency financial needs can cause individuals to tap their retirement accounts, incurring taxes and penalties. Mercer says some of this leakage could be prevented by allowing employers to automatically enroll workers in savings programs for both retirement and more immediate needs, such as paying off student loans or buying a home. In addition, for those currently enrolled, allowing them to continue contributing after they have made a hardship withdrawal would avoid further diminishing their savings. The current tax reform proposal includes a provision that would allow participants to continue contributing.

Finally, Mercer encourages policymakers to remove impediments to employers maintaining DB plans by taking Pension Benefit Guaranty Corporation (PBGC) premiums “off budget,” and by revising nondiscrimination testing rules for frozen DB plans. The Internal Revenue Service (IRS) has issued such nondiscrimination testing relief, and the current tax reform proposal would make this permanent.

Products November 8, 2017

Inside Insight on Fiduciary Reform at Merrill Lynch and Beyond

Two executives focused on institutional retirement business at Merrill Lynch sit down for a fiduciary chat, offering inside views of one major advisory firm’s approach to navigating regulatory uncertainty. 
Reported by

News broke in just the last week that the Department of Labor (DOL) has submitted for review by the Office of Management and Budget a new regulation to provide for a second delay in full enforcement of the Obama-era fiduciary rule expansion and accompanying exemptions.  

Until the final rule’s pending publication in the Federal Register, the exact details and length of the second enforcement delay will remain unclear, but industry reports are widely discussing an additional 18-month delay. The extension is clearly crafted to give the Trump administration more time to consider what it will ultimately do with the signature rulemaking implemented late in the final term of his predecessor. In particular, this additional year-and-a-half of transition would give the DOL and the White House a reasonable amount of time to consider the vast amount of industry commentary submitted in response to President Donald Trump’s preliminary request for information about the current and future impacts of the fiduciary reforms.

Never miss a story — sign up for PLANADVISER newsletters to keep up on the latest retirement plan adviser news.

With that news playing out in the background, John Quinn, who leads the institutional product development and platform management group at Bank of America Merrill Lynch, and Steve Ulian, leader of institutional retirement benefit plan sales and relationship management, sat down with PLANADVISER to discuss their firm’s broad approach to fiduciary reform. On the retirement side of the business, they suggest the firm is focused on promoting its Fiduciary Advisor Services program, which launched in June and allows a Merrill Lynch adviser working with institutional retirement plan clients to take on the role of a true 3(21) fiduciary.

“Plan sponsors tell us clearly they are looking for a real co-fiduciary partner who can give them specific, direct help in determining what their lineup should be,” Ulian explains. “But they want more than this as well. They want help crafting the investing policy statement, with tweaking and maximizing their plan design. They also want the ongoing investment monitoring and real recommendations for how to manage the plan over time.”

Quinn is quick to point out that this fiduciary-focused approach for institutional retirement business is not going away, regardless of what might happen at the DOL or even with the Securities and Exchange Commission (SEC) under president Trump.

“It very well may come to pass that we see a lengthy delay or full repeal of the fiduciary rule in its current form,” he explains. “But I can tell you right now we are fully committed to the product strategy we have put in place, which puts fiduciary services at the center of our offering. The chatter and some of the debate that is still happening on this front, it is not impacting our product strategy. We have made our decision based on what it is that we know plan sponsors are looking for today and in the future.”

Anecdotally, some retirement-focused Merrill Lynch advisers have told PLANADVISER that they have been waiting a long time for this type of change in the home office strategy. One suggested he finally feels liberated to take on more plan sponsor business as a “full-fledged fiduciary,” which he anticipates will be a strong boon for his specific book of business.

The Merrill Lynch adviser said he sees colleagues in the firm—those who have worked more in the role of a product provider or broker rather than with the identity of a plan design consultant or an adviser to individual plan participants—who “naturally are not thrilled” with the fiduciary evolution. His frank assessment was that some are having difficulty transitioning away from the commission-based business they have traditionally relied on. But as noted by both the adviser in the field and by Merrill leadership, “the fiduciary ship has sailed,” and the focus for new institutional business must shift away from commissions-based brokerage services.

Ulian and Quinn joke that the fiduciary advisory program isn’t exactly rocket science. “It’s based on the elements that you would expect,” Ulian says. “Clients receive direct support on recordkeeping and administration tasks, direct support with crafting and monitoring the investment menu, and their plan participants gain access to helpful retirement and broad-based financial education.”

«