Would Americans Balk at Mandated Offering of DC Retirement Plans?

With the Affordable Care Act and other pieces of major legislation that altered financial norms a guide, one expert asks whether a mandate to require employers to provide auto-enrollment retirement plans is a good idea against the backdrop of stubborn American individualism.

Jeff Kletti, head of investments at Wells Fargo Institutional Retirement and Trust, sat down recently with PLANADVISER to offer an inside look at trends and challenges taking shape within the company’s sizable defined contribution (DC) plan book of business.

Among various topics, the conversation focused in large part on plan sponsors’ embrace of passive target-date funds (TDFs), and how this trend includes some important points of subtlety that go beyond “active versus passive.” Kletti also took time to talk about the emergence of some ambitious pieces of Congressional legislation that would, if approved by the House and the Senate and signed by the president, more or less entirely change the U.S. employer-sponsored retirement planning landscape.

As examples he pointed to two bills put forward late in 2017 by House Ways and Means Committee Ranking Member Richard Neal, D-Massachusetts, quickly garnering the support of retirement plan industry advocacy and lobbying groups. The first of these was the Retirement Plan Simplification and Enhancement Act of 2017. Very broadly speaking, the Simplification and Enhancement Act includes provisions aimed at expanding retirement plan coverage and increasing savings levels, preserving lifetime retirement income, simplifying and clarifying qualified retirement plan rules, and implementing a limited set of defined benefit (DB) plan reforms. The next, the Automatic Retirement Plan Act, is an even more aggressive proposal that would require nearly all employers to have a retirement plan, either a 401(k) or 403(b) plan, and to automatically enroll participants. In addition, the bill would enhance employers’ ability to participate in open multiple employer plans, limit the formation of state-sponsored automatic enrollment individual retirement account (IRA) plans and permit workers to have 50% or more of their distributions invested in a “form that guarantees them lifetime income.”

Starting in 2020, the Automatic Retirement Plan Act would be applied to all employers, except those with fewer than 10 employees, those in business for less than three years and those qualifying as governmental or church organizations. For employers with 100 or fewer employers earning at least $5,000 in 2021, the bill would apply in 2022. Should an employer fail to comply with the law, they would be fined $10 per employee each day.

Reviewing this laundry list of potential changes, Kletti pointed to the mandated offering of an auto-enrollment 401(k) or 403(b) as the true game changer. And for that reason he expects the Automatic Retirement Plan Act would stir an incredible debate should it ever come up for genuine Congressional consideration—even a replay of the rhetorical warfare that from the first surrounded and still surrounds the Affordable Care Act. As Kletti sees it, there is not that big of a difference philosophically between requiring employers to offer health insurance versus requiring them to offer retirement planning benefits.

“Just to be clear, this is my personal standpoint on this very interesting and important topic,”Kletti said. “Frankly, I really like the idea of promoting default-driven plans, and the evidence is abundantly clear that automatic retirement plans can be very effective. However, my experience has been that the pendulum can swing too far in terms of mandates—as we have seen in our recent political past. I know it’s dangerous to make broad statements about American culture, but one can image the pushback that could arise if this proposal is viewed as too much of a top-down, federal government mandate.”

Even facing this challenge, Kletti said it is not impossible to imagine one or both of the Neal bills being a surprising success, perhaps in the wake of the 2018 midterm election cycle or beyond. Other proposals are circulating in Congress that would approach these issues in different ways, and the same goes for them, given that lawmakers on both sides of the spectrum have voiced cautious support for expanding retirement plan coverage. 

“It’s going to be a difficult balancing act between implementing and promoting the auto-features we know work so well, versus being viewed as overly paternalistic and controlling,” Kletti concluded. “And there is the other consideration that employers in this country are not a homogeneous population. Depending on the industry, geography and individual company culture, there can be very different relationships in place between employers and employees. Not everyone feels tied to their company and not everybody can save for retirement right now—and that is an important thing to consider.”