President Donald Trump on Friday afternoon signed an executive order aimed at “boosting retirement security” for everyday Americans.
The president signed the order during a public appearance in Charlotte at Central Piedmont Community College’s Harris Conference Center, where he was joined by Labor Secretary Alexander Acosta and Linda McMahon, administrator of the Small Business Administration.
The order calls on the Treasury Department to review and potentially update its rules establishing that individuals must begin making withdrawals from 401(k) accounts starting no later than six months after their 70th birthday. Additionally, President Trump also called on the Department of Labor (DOL) to consider the pros and cons of allowing small businesses to jointly offer 401(k) plans.
“This is such a big thing for American workers,” the president said. “We want to provide new retirement security to countless American workers and their families. We believe all Americans should be able to retire with confidence, dignity and economic security—provided you get out there and work a little bit, right?”
“Our goal is to lower the cost of retirement plans so that they can become an affordable option for businesses of all sizes,” Trump said. “Small businesses will no longer be at a competitive disadvantage. Reducing regulatory barriers allowing small businesses to band together to create low cost association retirement plans is such a big thing. They will have such strength to negotiate incredible deals, because they will have bigger numbers. We may even see small businesses make bigger plans than the large companies.”
Speaking after the president, Labor Secretary Alexa Acosta said “401(k) plans have a proven record, but one third of the private workforce does not have access to these plans. Most small business employers simply cannot, on their own, provide access to the highest quality retirement plans.” He said the DOL will work diligently on solving this issue.
In the common parlance of the 401(k) plan industry, such joint 401(k) plans are referred to as “MEPs” or “open multiple employer plans.” The term “pooled employer plans” is also common. In a conference call with reporters offered to preview the executive order, DOL leaders suggested their department historically has discouraged unrelated businesses from collaborating on open MEPs because of the potential for abuse. But shifts in broader industry compensation and reporting best practices have brought significantly greater transparency to the retirement plan industry, making this an appropriate time to reconsider the prohibition against open MEPs.
Industry stakeholders have been calling loudly for greater use of open MEPs as one of the primary ways to address the retirement plan coverage gap. While there has been less discussion of the RMD issue, it is also a timely matter for today’s retirees. In fact, 68% of retirees are only taking the required minimum distributions (RMDs) from their retirement accounts, Ameriprise Financial recently found in a survey of more than 1,000 retirees with at least $100,000 in investable assets.
According to TIAA’s Larry Chadwick, head of government relations, easing of RMD rules will help a lot of current and future retirees.
“With longer life expectancies comes an increased risk of outliving retirement savings,” he suggests. “Allowing retirees to keep more of their money in their retirement plan or individual retirement account longer can help mitigate this risk. With more people living longer in retirement, saving more and seeing the benefits of lifetime income are increasingly important. We are encouraged by the steps taken today and encourage the administration and Congress to pursue policies that will increase savings ease and access to lifetime income products. Congress could help build retirement security further by passing the Retirement Enhancement and Savings Act which enjoys broad bipartisan support.”
Finally Time for Open MEPs?
Open MEPs enjoy the broad support of practically every retirement industry provider, analyst and advocate. For this reason, many industry practitioners are using the executive orders as another opportunity to encourage Congress to pass the Retirement Enhancement and Savings Act, known fondly by the industry as “RESA.” RESA includes a proposal for encouraging the broader use of open MEPs. The sweeping legislation would treat open MEPs as one plan under the Employee Retirement Income Security Act (ERISA) and take care of the “one bad apple” rule to prevent one participating employer from disqualifying the whole plan.
In a recent interview with PLANADVISER, Lew Minsky, president and chief executive officer of the Defined Contribution Institutional Investment Association (DCIIA), said his organization is a supporter of a number of different strategies to address the coverage gap. But he said the open multiple employer plan idea is the most exciting.
“We know that the very large DC plans do so well because they can benefit from economies of scale, so why shouldn’t we try to get small businesses to benefit in the same way?” he asks. “In our experience, there is near-universal agreement that open MEPs are a good idea. We just need to get it done, with the support of the government or without. Legislation [and executive orders] to help facilitate open MEPs would certainly be welcome, but there are creative approaches and solutions that the industry could bring to bear on its own. We are actively discussing all of this with providers and we hope the industry can keep pushing this topic forward.”
Minsky suggests open MEPs will be a big boost to retirement readiness for the U.S. workforce, but they are not a panacea. He pushes for an “and, and, and” approach, instead.
“We should be considering any and all ideas that can help close the coverage gap, and we should really also be conscious that there is not going to be one silver bullet here,” Minsky concludes. “Progress on the coverage gap can and will come it steps and by evolving our thinking about the existing framework.”
Others have suggested the main opportunity to pass all or part of RESA in the next year will come once the House returns from summer recess to tackle “Tax Reform 2.0.” Christopher Spence, leader of retirement industry advocacy for TIAA, stands firmly in the camp supporting RESA and suggests parts of the bill may be tacked on to any tax reform laws passed before the end of the year.
“I don’t think it is overselling RESA to say that it would be the biggest change to retirement policy in many years, certainly since the Pension Protection Act,” Spence observes. “From my perspective as an industry lobbyist it is our North Star right now. There is strong consensus that the bill would really build on what the Pension Protection Act accomplished. I can’t name a single person I interact with in the retirement industry that is opposed to passage.”
Executive Orders Can Fall Flat
Experts say Congressional action is needed because of the limited power of the executive branch to effect lasting change in this area. Looking back at the impact of previous executive orders (and the resultant regulatory actions) issued by presidents regarding retirement security issues shows such unilateral actions do not always have a lasting impact. President Barack Obama’s 2015 executive order to establish the “MyRA program” is a case in point.
After introducing the concept during his fifth State of the Union address, Obama directed the United States Treasury to create a new way for working Americans to start their own retirement savings, called a “myRA.” He described a myRA as a new savings vehicle that encourages workers to save for retirement by offering, as Obama put it, “a decent return with no risk of losing what you put in.” Contributions, under the Roth-like arrangement, would not be tax-deductible, but future earnings at the time of withdrawal would be tax free. Workers using a myRA would earn interest at the same rate as the federal employees’ Thrift Savings Plan (TSP) Government Securities Investment Fund.
It took about a year to roll out the program, and when it became available nationwide in the waning years of the Obama presidency, uptake was fairly anemic. Ultimately the Trump administration cancelled the program, citing the taxpayer expense of administering the accounts and the lack of utilization by workers.
And for his part, President Trump has already issued an executive order in the retirement domain that did not ultimately have a big impact. Back in February 2017, President Trump directed the Department of Labor (DOL) to examine the Obama-rea fiduciary rule expansion to determine whether it may adversely affect the ability of Americans to gain access to retirement information and financial advice. As part of this examination, he ordered the agency to prepare an updated economic and legal analysis concerning the likely impact of the fiduciary rule and proposing potential alternatives. Ultimately the order did not result in the Trump administration issuing any new fiduciary regulations of its own, and instead the DOL fiduciary rule was derailed by a surprise decision out of the United States 5th Circuit Court of Appeals.