Hoffman opened the Northeast Area Benefits Conference, co-sponsored by the IRS and ASPPA (American Society of Pension Professionals and Actuaries), by discussing an array of issues in which Washington and the retirement industry are trying to help Americans reach a secure retirement – at a time when the country’s financial situation is far from secure.
Lifetime Income Options
The first issue he addressed was lifetime income options. Taking a step back, Hoffman briefly walked through the steps that have transpired for the past year and a half. In February 2010, the Department of Labor (DoL) and the Department of the Treasury issued a request for information (RFI) asking one main question: should the government be facilitating access to and use of lifetime income distribution options? The Departments received nearly 800 comments regarding the issue, and in September, they held a two-day hearing (see “Lifetime Income Hearing Witnesses Demand Fiduciary Shield”). The Departments also asked more specific questions, trying to determine what causes plan sponsors to not offer a lifetime income option and why most participants elect not to use a lifetime income option if given the choice.
Hoffman said the comments from that hearing are still being reviewed and it is unclear what the next step will be. He added that what he found interesting was how the whole discussion was picked up by mainstream media and many people saw the RFI has a “government takeover of your 401(k).” This caused the DoL to play defense, trying to clarify that no part of the RFI had to do with taking over anything, but exploring ways in which to incentivize people to take annuities or other lifetime income options.
Hoffman also brought up the Lifetime Income Disclosure Act of 2011 (S. 267), which would require defined contribution plans to include “annuity equivalents” on benefits statements once per year. “The fear is that it would be looked at as a guarantee rather than an estimate,” he said, so the details of that bill, co-sponsored by Senators Bingaman (D-New Mexico), Isakson (R-Georgia), and Kohl (D-Minnesota), are still being ironed out. He added that ASPPA is in support of this bill – it is preferable to any mandatory action and he said ASPPA believes the actual calculation wouldn’t be too difficult to figure out.
Hoffman also discussed what Washington is trying to do to stem the flow of leakage out of 401(k) plans. The SEAL Act of 2011, or the Savings Enhancement by Alleviating Leakage in 401(k) Savings Act of 2011 (S. 1020), is intended to address this issue.
The SEAL Act is co-sponsored by Senators Kohl (D-Wisconsin) and Enzi (R-Wyoming). In its original form, it would do the following:
- Allow no more than three loans at the same time
- Prohibit “credit-debit card” 401(k) plan loans
- Allow repayment/rollover of loan offset amounts into an IRA rollover account as late as the due date of the tax return for year of distribution
- Direct the IRS to rewrite their regulations to not require a six-month suspension after a 401(k) hardship distribution
However, the bill has been reintroduced without the first bullet included. Hoffman said the bill would also change a previous law that stated if you take hardship withdrawal, you are not allowed to contribute to the plan for six months. This bill would eliminate that rule.
The next issue Hoffman discussed at the IRS-ASPPA conference was the Obama administration’s auto-IRA proposal. It was introduced in the last Congress by Senator Bingaman (D-New Mexico) and Congressman Neal (D-Massachusetts). It is expected to be reintroduced this session, and follow the Administration’s basic proposal, which called for employers with 10 or more employees that do not have a qualified plan in place to implement an auto-IRA. There would be limited employer responsibility/liability, as well as a tax credit for startup costs ($25 per employee up to $250 max) or a double current start-up credit for qualified plans (to $1,000/yr).
Both proposals have standardized investment options, said Hoffman. However, Bingaman wants to see a Roth default, a method for assigning defaulting employers to approved private sector providers, and a four year phase-in starting at 100 or more employees. Neal wants a traditional IRA default and an “R bond” employer default.
Hoffman said this proposal encourages discussion on how to limit employer liability, but it may have a better chance at passing if incentives are used, rather than a mandate.
Financial Reform Continues
Hoffman touched on two very controversial topics relating to financial reforms being enacted as a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The first is the new Bureau of Consumer Financial Protection (BCFP), which will potentially have regulatory authority over retirement-plan service providers. The final bill says that the BCFP can ask to have authority over an issue, as long as the DoL and Treasury have to agree to give jurisdiction.
Lastly, Hoffman discussed the latest news from National Commission on Fiscal Responsibility and Reform. The Commission, which has 18 members (six Presidential appointments, six chosen from the House, and six from the Senate), was divided into three working groups: one to discuss tax reform, one for mandatory spending, and one for discretionary spending. They needed 14 members to agree to a plan of action, but only 11 were able to agree, according to Hoffman. Nevertheless, its recommendations are expected to be part of upcoming deficit reduction and tax reform proposals.
Hoffman said ASPPA is very concerned about the figures the Commission is using to calculate how much defined contribution plans are costing the government. The Commission is using the “Estimates of Federal Tax Expenditures for Fiscal Years 2010-2014” prepared by the Joint Tax Commission. This report says that by 2014, defined contribution, defined benefit, and self-employed pension plans will cost the government $141.4 billion. What they are failing to calculate is that this money will be taxed once it is distributed back to the participants, Hoffman said.
The bottom line, Hoffman said, is that there are two separate issues that go hand-in-hand: the deficit and tax reform. “It remains to be seen when a bill will be enacted, but the work for that bill is going on now,” he said. “It’s a very, very fluid environment, and once we decide what the targets are, it will be hard work to make tax reform. It might not matter to the man on the street, but it matters a lot when you’re trying to sell a plan to small-business owners.”