An Adviser Eye on Washington
Legislation Supports Lifetime Income Disclosures
U.S. Senators Johnny Isakson, R-Georgia, and Chris Murphy, D-Connecticut, have introduced a bill they are calling the Lifetime Income Disclosure Act, which would require 401(k) plan sponsors “to inform participating workers of the projected monthly income they could expect at retirement based on their current account balance.”
The senators say they have garnered significant bipartisan support for the bill, which they believe will help average Americans ensure they do not outlive their savings in retirement.
“With the shift to 401(k) plans, American workers have become increasingly responsible for putting savings into and managing their retirement investments,” the senators explain. “However, many Americans are not saving enough, and they are unsure how quickly to draw down their savings in their retirement years.”
The theory behind the legislation is far from new thinking; this bill represents just the latest instance of Washington lawmakers putting their names behind an effort to reform and improve retirement plan performance in the United States. In 2013, the Department of Labor (DOL)’s Employee Benefits Security Administration (EBSA) proposed rulemaking on the subject. In the comment period that followed, some industry practitioners expressed concerns that the financial assumptions and calculation tools underlying such disclosures must be customizable enough that participants will be given an accurate income projection.
Monitoring More Critical Post-Tibble
“The main impact of Tibble v. Edison in my view is that it’s a good reminder that plan sponsors need to sharpen their pencils and look once again at the processes they’re using, both for selection and monitoring of investments,” says Nancy Ross, partner, litigation and dispute resolution, with Mayer Brown in Chicago.
She is, of course, talking about the Supreme Court’s decision in the Tibble v. Edison case, a closely followed example of 401(k) fee litigation playing out between a large plan sponsor and a large class of similarly situated participants. Like others interpreting the outcome of the case, Ross feels the recent decision took a modest step to solidify the “ongoing duty to monitor [investments]” as a fiduciary duty under the Employee Retirement Income Security Act (ERISA)—a duty separate and distinct from that requiring exercise of prudence in selecting investments for use on a defined contribution (DC) plan investment menu.
As explained by Ross and Brian Netter, a partner in Mayer Brown’s Supreme Court and appellate practice in Washington, D.C., plan sponsors must prove that they have carefully deliberated each investment selection and that they have a well-established monitoring procedure. Beyond this, sponsors need to follow such procedures, Ross says, not just have them written down. “The duty to monitor will start popping up as a separate claim—that you failed to monitor a service provider, for example,” Netter adds.
DOL Wants More Control Over Plan Audits
The Employee Benefits Security Administration (EBSA) has published its study on the efficacy of benefit plan examinations performed by certified public accountants (CPAs), “Assessing the Quality of Employee Benefit Plan Audits.”
The agency says the report reveals serious issues with the current system. “The existing patchwork of regulations and rules needs to be overhauled, and a meaningful enforcement mechanism needs to be created,” says Assistant Secretary of Labor for Employee Benefits Security Phyllis Borzi. “The department is proposing, among other measures, legislation that will fix these problems.”
More than 7,300 licensed CPAs nationwide audit more than 81,000 employee benefit plans, according to EBSA. The agency’s review found that only 61% of those examinations fully complied with professional auditing standards or had only minor deficiencies under professional standards. The remaining 39% of the audits contained major deficiencies, however, putting $653 billion and 22.5 million plan participants and beneficiaries at risk. These figures reflect increases in the amount of plan assets and number of plan participants at risk compared with prior EBSA studies.
The American Institute of Certified Public Accountants (AICPA) anticipated the study results. “Poor audit work is a concern to us. It is unacceptable. It is something we take very seriously,” says Sue Coffey, the AICPA’s senior vice president for public practice and global alliances, in New York City.
Coffey says that, in 2017, the institute will roll out a new CPA exam to not only test individuals’ knowledge but their competency. She adds that the AICPA will issue a competency framework for employee benefit plans to help practitioners assess whether they have the skills needed for their plan’s financial audits and, if not, what curricula they need to gain competency.