A recent article published in the Wall Street Journal, “Retirement Bills in Congress Could Alter 401(k) Plans”, reviewed a number of proposed changes to existing retirement and savings plans being considered in Congress. The following proposals are currently working through a bi-partisan Senate bill known as the Retirement Enhancement and Savings Act, or RESA, sponsored by Senate Finance Committee chairman, Orrin Hatch (R., Utah) and its top Democrat, Ron Wyden of Oregon.
Among the various proposals for change in 401(k) plans are the following:
- Allowing small employers to join multiple-employer plans, or MEP’s, regardless of affiliation with an industry trade association as is now required.
- Incentives to 401(k) plan sponsors to offer annuities which would allow participants to transform their balances into lifetime monthly income streams. Plan sponsors must disclose the monthly annuity income their savings would support and would be protected from future lawsuits when selecting an annuity provider.
- Further incentives for employers (not specified in the article) to adopt automatic enrollment provisions to their plans.
- An expansion of the tax credit currently available to small companies to offset the costs of starting a new 401(k) plan.
The article explains that while there is broad interest by both sides of the aisle in encouraging saving and retirement, the good news appears to be that it isn’t clear which, if any, of these measures would likely survive the legislative process.
Forgive my skepticism, but this promise by Congress to help us all save more in our retirement accounts should be regarded with the same cynical response as when we hear the following statements:
“The check is in the mail.”
“You look good in a cowboy hat!”
“I’m from the government and I’m here to help you!”
Is this really what the Washington “experts” call a comprehensive solution to the savings crisis in America? As John McEnroe so eloquently stated, “You have got to be kidding me!”
Multiple Employer Plans Are Not the Answer!
Just to bring everyone reading this up to speed, a multiple-employer 401(k), or MEP, is a 401(k) plan that is co-sponsored by two or more unrelated employers. Trade associations have offered “closed” MEPs to members for decades. Recently, some 401(k) providers have begun offering “open” MEPs which any employer can join. Regardless of type, MEP’s require more complex annual administration because they have the potential to co-mingle the assets of hundreds of employers. While MEP providers promote these plans as having lower fees due to “economies of scale” while reducing the 401(k) fiduciary liabilities to employer co-sponsors, in truth, MEP’s offer neither.
In a December 13, 2017 piece titled, “Why Multiple Employer Plans are Obsolete Today”, Eric Droblyen, President and CEO of Employee Fiduciary, makes the following points about MEPs:
- The claim that MEP’s offer lower fees and higher quality services “may have been true 10+ years ago in an environment of hidden fees…and rewarded plans with lots of assets. However, that’s not the case today.” He observes that even start-up plans with no assets can access low-cost institutional investments and advice and that “technology has made 401(k) administration services cheaper than ever to deliver, allowing 401(k) providers to charge low flat fees.”
- Employer co-sponsors still retain the difficult (if not impossible) fiduciary responsibility to monitor all 401(k) providers given discretionary control or administration of plan assets. Droblyen argues that this oversight is beyond the scope of most, if not all, employers and “ironically, actually increases an employer’s fiduciary responsibility”.
- “Good luck getting out of an MEP”, writes Droblyen. Unlike single employer 401(k) plans, employers who are part of an MEP lack the authority to terminate their portion of the plan. This creates big problems, he believes. “Employee accounts can be stuck in a MEP until they terminate employment or become eligible for an in-service distribution.”
Just try rolling that news out to angry employees who want to re-locate their retirement balances into an IRA!
401(k) Annuity Options Benefit Insurance Companies – Not Most Retirees.
Let’s begin with the two main advantages of owning an annuity. Most annuity options within 401(k) plans today are variable annuity products with what is termed a “Guaranteed Lifetime Withdrawal Benefit” rider. Because insurance companies typically guarantee the benefit base, these products do offer a “back-stop” against down markets, especially near retirement age. There is also a form of longevity insurance in that once annuitized, the payments are guaranteed for life.
However, these intended benefits usually come with high embedded fees and perhaps more significantly for younger savers, the opportunity costs of investing in traditional securities that generate significantly higher long-term returns.
“Any insurance product is going to have a negative expected value”, says Daniel Farkas, a senior investment consultant with Morningstar Investment Management. Farkas adds, “I mean that on average, you are going to have been better off if you didn’t buy the insurance; that’s the case for these products”.
Inherent in the logic of this bill is that employees to analyze and compare these instruments against other alternatives in order to evaluate whether they make sense for their situation. And that’s the problem: in most cases, they can’t. It’s critical that plans that offer complex financial instruments such as GLWB riders have access to an investment advisor who can help them make good decisions with these products. If you are not getting this kind of service with your current advisor, Strategic Retirement Partners can help.
The argument I’m making here is not that all insurance products are bad, but that the annuity initiatives included in these proposals will ultimately be directed at a demographic that can neither define what an annuity is or how it will likely work for their own retirement situation. An overwhelming majority of employees do not have the knowledge or understanding of financial instruments to properly evaluate whether a variable annuity is right for them. And they have even less capability to evaluate and monitor the financial risk inherent to the insurance company backing these legal promises. That sounds like trouble to me.
If I Lose My Investment, I Can’t Sue You!
The proposal to limit the fiduciary liability to employers who include a variable annuity option in their 401(k) is shockingly self-serving and reveals the true beneficiaries of this proposal – the insurance companies who offer these products and their quid pro quo with lawmakers who seek future campaign contributions. To lower the fiduciary liability for certain financial instruments simply to enrich insurance company profits is misguided policy at best, dangerous for savers, and bad for our industry.
Auto–Enrollment Is Not Broken, So Don’t Try to Fix It!
Auto enrollment today is one of the fastest growing 401(k) plan features. In addition to the fact that plans adopting this feature have significantly higher participation rates, employers have been incentivized by greater flexibility with eligibility and vesting options and lower safe harbor matching requirements. Currently, eligible employees may already opt out or change their deferral percentages without penalty. That’s the trouble with government: fixing things that are not broken and not fixing things that are broken.
Auto-enrollment has had a tremendous impact on plan participation since it was introduced in 2006. But like most plan features, it is not right for every plan. At Strategic Retirement Partners, we will help you determine if an auto enrollment feature belongs in your plan.
Increasing the Tax Credit Will Increase the Number of 401(k) Plans.
One of the biggest hurdles for small employers in their decision to establish these plans is the up-front administrative costs to create and file the plan documents and employee communications. While the current tax credit– 50% of administrative expenses over the first three years of establishing a plan, up to $1,500 – is critically important in offsetting a portion of this cost to employers, increasing the amount of this credit or accelerating the time period in which it can be applied would be the single most effective measure in this proposed legislation. Enhancing the tax credit for employers with fewer than 100 employees will significantly increase the number of 401(k) plans and is smart policy.
You Look Good in a Cowboy Hat!
In summary, the proposals under consideration by RESA, with exception of an increase in the tax credit for new plans, appear to be weak at best. And in the case of incentives for obsolete MEPs and complex variable annuities, they are potentially damaging to the savers it seeks to help.
If you say the check is in the mail, I’ll believe it when I see it.
If you think you look good in a cowboy hat, God bless you!
But if you say you are with the government and you are here to help me, I think I’ll take a pass on that one!
Brian C. Rall
President – Strategic Retirement Partners, LLC
Strategic Retirement Partners is an independent, boutique investment advisory and consulting firm providing plan design, vendor search, investment selection, fiduciary guidance and participant education for company sponsored retirement plans.
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