President Obama didn’t give details of retirement initiatives in his State of the Union address, but he did advocate for the portability of benefits, saying portability was one intent of the Affordable Care Act (ACA) and that when people move from job to job, their retirement benefits should go with them.
However, this week, Department of Labor (DOL) Secretary Tom Perez introduced a number of retirement proposals that are going to be included in President Obama’s 2017 budget.
One of the primary initiatives is that the administration will be looking to work with Congress on broadening multiple employer plans (MEPs). One of the unnecessary barriers Perez cited was that under current law, there has to be commonality between employers coming together to form a MEP. The administration would like to open up the program so that employers could more readily access an open MEP, such as those from different sectors but a similar location, for example, he said.
This was one complaint expressed by commenters to the DOL’s proposals for state-run retirement plans—that allowing states to form MEPs was unfair to the employer-sponsored retirement plan industry.
Following the announcement of the initiatives, Barbara Novick, vice chairman at BlackRock issued a statement saying, “We favor President Obama’s 2017 budget proposal to eliminate the current ‘nexus’ requirement for employers to participate in a MEP. Participating in a MEP allows a small employer to offer employees a 401(k) plan with lower administrative burdens and less expense. If unrelated employers can participate in an open MEP, they can pool resources and reduce costs, which creates a positive incentive to adopt plans.”
According to Novick, BlackRock also recommends relaxing existing Employee Retirement Income Security Act (ERISA) and Internal Revenue Service (IRS) reporting and disclosure rules and testing requirements, particularly for small employers. “We urge the DoL and Treasury to work together to improve accessibility to plan information and education and to make it more straightforward to establish and maintain a plan,” she stated.NEXT: Portability will keep savings in the system
The president’s 2017 budget will include a $100 million grant proposal to encourage the development of portability ideas for benefits that will allow workers to take their retirement benefits and other employment-based benefits from job to job. According to a fact sheet about the initiatives, he goal is to develop and test models that are portable across employers and can accommodate intermittent contributions or contributions from multiple employers for an individual worker. In addition, the DOL will evaluate existing portable benefits models, and examine the feasibility of greater change.
Spencer Williams, president and CEO of Retirement Clearinghouse (RCH) in Charlotte, North Carolina, explains to PLANADVISER that portability was established in legislation which gave birth to the rollover IRA market. “By statute, you can take defined contribution (DC) plan accounts with you to a new employer, and in general, employees can take money out of the plan when they terminate,” he says.
However, according to Williams, huge chunks of the DC plan market were overlooked—the small account balances, which is what RCH works to save. “That’s two-thirds of all people who change jobs every year,” he says. While legislation enables them to roll over their small balances, the requirements for assuring qualification and the process it takes to implement the rollover make those with small balances likely to cash out because it’s easier, Williams contends. “Sixty percent of people with $5,000 or less in their DC plans are cashing out; some may need money, but for the biggest part, it’s because too much work is involved to move it. If we remove the friction, more plan participants will stay in the system.”
RCH believes automatic portability is the most efficient way to remove friction, and is seeking a confirmation from the DOL to use negative consent to move small plan balances from one employer to another. “This will get a sizeable part of those 60% cashouts to stay in the system,” he says. “We’ve spent countless hours educating trade groups, regulators and legislators, so it is gratifying to see them catch on.”NEXT: Auto IRAs
The President’s 2017 budget will include a proposal—that he’s included in his past budgets—that would require employers with more than 10 employees that do not currently offer a retirement plan to automatically enroll their workers into an IRA. Other individuals not automatically enrolled could participate so long as they fall below the income cutoff, and could continue to make their own contributions even if they change jobs. Employers with 100 or less employees who offer an auto-IRA would receive a tax credit of up to $3,000.
Caring Across Generations, a group that advocates for policy changes around caregiving, applauded all initiatives announced, but noted that one in three workers currently do not have access to a retirement savings plan, and professional caregivers and family caregivers for seniors are at particular risk of lacking any kind of retirement security. “A growing majority of professional caregivers are part of the flex economy where the structure of work is too inconsistent to invest in retirement. Additionally, many family caregivers have to take time off or switch jobs to adapt to their families’ needs. Ensuring that the people who care for our older loved ones, one of the nation’s fastest growing workforces, can themselves retire and age with dignity is imperative,” it said in a statement.
Williams noted that almost all initiatives go through evolution, and anything that expands coverage at this point in the game is good. Speaking about auto IRAs he says, “I would assume that getting them in place is a first step and letting them evolve is classic America.”
However, Williams also thinks an auto IRA system has the potential to create more disconnected accounts, so portability initiatives in addition to the auto IRA initiative “are important to avoid a mess.”