President seeks eased regulation of shared 401(k) plans and reduced mandatory withdrawals
By Stephen Miller, CEBS
August 31, 2018 - SHRM
updated on September 4, 2018
On Aug. 31, President Donald Trump signed an executive order calling on the federal government to revise regulations deemed burdensome to plan sponsors and retirement savers. He asked, for instance, for revised rules to ease required 401(k) plan disclosures and to help small employers partner in shared multiple-employer plans (MEPs) that would be less costly and less burdensome to administer than offering a single-employer plan.
The executive order is part of a larger administration initiative to enhance retirement security and expand access to retirement savings plans, the White House said.
"The stated goal of the executive order is to lower the cost of retirement plans so that they can become an affordable option for businesses of all sizes, so that small businesses will no longer be at a competitive disadvantage," said benefits attorney Erin Turley, a partner in the Dallas office of laws firm McDermott Will & Emery.
Banding Together
"Both Congress and the business community have recognized that the costs of running and maintaining compliance for a typical 401(k) plan can discourage small businesses from establishing and maintaining those plans, and where established, the administrative costs can eat into the growth of the retirement savings of plan participants," Turley said.
The order directs the Departments of Labor (DOL) and Treasury to propose regulations that allow unrelated businesses to offer what the order calls association retirement plans (ARPs). The idea is similar to association health plans (AHPs), which received a regulatory boost when, in June, the Department of Labor finalized a rule to make it easier for small businesses across different industries to join an association expressly to purchase a shared health insurance plan for their employees.
ARPs "could offer an efficient way to reduce paperwork and administration costs for small businesses," wrote Secretary of Labor Alexander Acosta. "This means small-business owners could focus on running their businesses rather than running retirement plans—while still creating opportunity for their employees to prepare for a financially secure retirement."
"The Society for Human Resource Management has long supported creating a way
for small employers to band together to help ensure a secure retirement for all
Americans," said Nancy Hammer, SHRM vice president for regulatory affairs and
judicial counsel.
Last year, the Pew Charitable Trusts reported that small businesses most often cited expense, limited administrative resources, and lack of employee interest as reasons for not offering retirement plans, based on a survey over 1,600 small- and medium-sized business owners or managers.
Shared 401(k)s or similar defined contribution retirement plans aren't exactly new. Currently, however, there must be a "commonality" among employers before they can join in a "closed" MEP, such as auto dealerships or other kinds of franchises, or businesses in the same industry that belong to a common trade association.
The Retirement Enhancement Savings Act (RESA) now before Congress would allow unrelated small employers to band together in an "open" plan, or what RESA calls pooled employer plans (PEPs). Under the proposed legislation, a PEP that covers fewer than 1,000 participants would be allowed to file a single-plan annual report with the Secretary of Labor, as long as no single participating employer has 100 or more participants covered by the plan.
Even without passage of RESA or similar legislation, the DOL, on its own, could provide relief in several areas, such as by eliminating the commonality requirement among participating employers and allowing for the outsourcing of fiduciary liability under the Employee Retirement Income Security Act (ERISA) by the participating employers to the plan sponsor, Turley said.
The IRS could protect employers in a shared plan from ERISA liability created
by a noncompliant employer, known as the "one bad apple" rule, which has been a
deterrent to participating in the current closed MEP model, she noted, so that a
disqualifying defect by one employer only impacts that employer's ability to
continue in the plan and doesn't disqualify the plan as a whole.
While RESA would make it easier for financial services providers to set
up and administer multiple employer 401(k) plans, new regulations for ARPs would
be more limited and could require unrelated business to join an association to
participate in a shared plan, benefits attorneys said. Association health plans
"could be the model," wrote Robert Alin, general counsel at Pentegra Retirement
Services. "The AHP rules may serve as a template for similar rules on retirement
plan MEPs."
Lowering Required Withdrawals
The executive order also asks the Treasury Department to review its rules for mandatory annual withdrawals from traditional 401(k) plans and individual retirement accounts (IRAs) starting at age 70½. Withdrawn funds are taxed as income. Roth accounts are not subject to these required minimum distributions (RMDs).
The amount that account holders must take out annually is based on life
expectancy tables issued by the IRS. Adjusting these tables could allow account
holders to take lower RMDs, helping them to avoid draining their accounts of
funds that might be needed later in retirement, financial advisors said.
gAmericans have experienced longer life expectancies in recent years and with
updated mortality tables the [RMD] amounts will decrease, thereby allowing
participants to keep more money in their 401(k) plans and IRAs for longer
periods,h according to a post by the Boston-based Wagner Law Group.
Reducing Paperwork
The executive order directs the Departments of Labor and Treasury to consider ways to improve notice requirements to reduce paperwork and administrative burdens.
gExpanding access and modernizing disclosure requirements are important ways
the federal government can strengthen retirement security,h said Rep. Virginia
Foxx, R-N.C., chairwoman of the House Committee on Education and the Workforce,
and Rep. Tim Walberg, R-Mich., chairman of the Subcommittee on Health,
Employment, Labor, and Pensions, in a statement.
Promoting In-Plan Annuities
The executive order seeks new regulation that would protect plan sponsors
from participant lawsuits if they provide an option within the 401(k) plan to
invest in annuities that guarantee to pay out lifetime retirement income.
Employers have hesitated to provide in-plan annuities due to the liability
risks they could face if the annuity provider defaults on its
commitment.
Only 8 percent of organizations provided an in-plan annuity option this year,
down from 9 percent in 2017, according to a survey of SHRM members conducted earlier this
year.