Compliance November 18, 2015

Road Ahead for Auto-IRAs and Open MEPs

ERISA attorney David Levine offers a few thoughts about the potential road ahead for auto-IRAs and state-run open MEPs for the private sector.
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PLANADVISER caught up with David Levine, principal and ERISA-specialist with Groom Law Group in Washington, D.C., a few days after the Department of Labor (DOL) published much-anticipated and increasingly controversial pieces of guidance to aid states with offering retirement planning solutions to private-sector workers who lack access to tax-qualified retirement plans at work.

Action this week from the DOL was two-fold, Levine explains. The Department’s Interpretive Bulletin 2015-02 sets forth its current view concerning the application of the Employee Retirement Income Security Act (ERISA) to “certain state laws designed to expand the retirement savings options available to private-sector workers through ERISA-covered retirement plans.” The Department separately released a proposed regulation describing safe-harbor conditions it would like to set up for states and employers to avoid creation of ERISA-covered plans as a result of state laws that require private-sector employers to implement in their workplaces state-administered payroll deduction individual retirement account (IRA) programs, commonly referred to as auto-IRAs.

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In a conversation with PLANADVISER, Levine suggested the DOL’s rulemaking may not be as final or conclusive as the industry’s swift reaction would lead one to believe.

Q: What do you see as the most important elements emerging in the DOL’s interpretive bulletin and proposed rule?

There are different channels to look at here moving forward. You have the marketplace channel, you have the mandatory participation channel, and then you have the people who are focused on trying to do collectivization through an open multiple-employer plan (MEP) approach. And then you also have the prototype plan approach that was given the OK by DOL, but virtually nobody is doing that at the state level right now. There are some states that have potential prototype approaches based on their own plans for state workers, but there aren’t very many where that would be a good approach, it seems like.

The administration folks have been talking since they first came in that they’re worried about the coverage gap, and now this is their effort to try to close that gap. As I’m sure people have seen, there are lots of parties with different concerns about a level playing field and just the politics of it all. Private providers want to know, why is it you can have an open MEP run by the state for the private sector, but not such a plan run by the private sector for the private sector?

The DOL shares some arguments for this in the interpretive bulletin, and those will be more or less convincing to different parties. But one important challenge that I think DOL should answer and will have to answer is why the federal government doesn’t think the provider community is capable of delivering open MEPs, but somehow the state governments are going to be successful. 

Q: Are you at all surprised by how directly some provider advocacy groups have come out and challenged this approach to closing the coverage gap? In a way, they are challenging a move to close the coverage gap, but then again they do have a right to fight for a level playing field. How do you see this playing out?

Right, I think the big issue here is just about consistency. In states that choose to go with the open-MEP approach this is especially the case. If you remember it was just in 2012 that the DOL came out with two advisory opinions where they basically said open MEPs won’t work for the private sector—and now with a quick analysis they have said the public sector can be successful in providing this to the private-sector workers. The concern coming from the private market providers is, how is this possibly consistent or fair? Will it really work?

We know people are going to make comments and be unhappy with this. The question is, where does this go from here? Articles have focused so far on what are peoples’ reactions, what I think is important too is thinking about, where do we go from here?

As it relates to auto-IRA and mandatory-coverage IRA programs especially, I think it’s perhaps less problematic than some providers are expecting at this early stage. For these things to be non-ERISA there are, I’m counting, 12 distinct requirements for these mandatory-coverage IRAs to actually get the safe harbor. So you’ve clearly got a number of steps the states will have to work through to deliver these products. It’s safe to say they will work through these steps, I think, but it remains to be seen what the final solutions will look like when brought to market and whether it will be an uneven playing field.

The DOL has said it has carefully designed its guidance to work with the states on this. As they move forward, I would not be surprised if we hear pretty serious opposition if the private sector thinks this goes too far—a process reminiscent of the fiduciary-rule debate even. 

Q: What about on the open MEP side? What do you see as the likely outcome?

Yes, this to me is a whole different discussion, because MEPs have been viewed by many for small employers to be potentially a very positive and effective solution to get people saving—to cover all these uncovered people, as it were. That would probably be a positive for everyone, getting more people into the overall retirement system and making it easier for small business employers to maintain some type of retirement plan.

How settled the open MEP question is remains unclear when we remember the critical mass of proposals floating around Congress. You already have the SAFE Act from Senator Hatch. There’s the Retirement Security Act introduced both in the House and the Senate with Democratic and Republican support. You have now-retired Senator Harkin’s USA Retirement Fund proposal on MEPs.

This is the time when everyone is going to start looking towards the Hill. There is bipartisan support and there is workable legislation out there. Obviously there is room for clarification and improvement in these pieces of legislation and the proposed regulations and guidance now emerging from DOL. It’s not just the private sector that would benefit from a federal framework—it would also help the DOL with enforcement and its ability to do the kind of policing it wants to do.

To me, and where the attention is already turning among our clients, the question now is: What can and will the Hill do at this point? Is there an opportunity for lawmakers and regulators to move together in a way that creates a level playing field and level contours for providers while sweeping all these uncovered people into the system. It’s very doable in my opinion. We need the regulatory certainty. It will solve preemption issues that are going to emerge—that’s where the discussion will move now.

Finally, one question that’s still unresolved in the open MEPs, under the preexisting framework you could not as a state, how do I put this, require an employer to maintain participation in an open MEP. So there is need for a dialog about how we rectify all this. How do we reach the small employers who would really benefit from MEPs and get them to participate? Will the states do this like a 529 program an organize their select vendors? Will a vibrant marketplace be allowed to emerge around the MEP?

Depending on what Congress does in the end, I think we could still very likely get a good outcome, where MEP guidance actually benefits all parties. 

Q: One question to leave you with, would you agree there is a meaningful retirement-centric movement in Congress that could hammer out a real open MEP system and materially change the coverage conversation? Retirement issues were tied into the budget agreement and retirement income adequacy clearly seems to be on the minds of legislative and administrative leadership. Maybe we will see some of these questions we have discussed answered sooner rather than later? 

Absolutely, the answer I would leave you with is that I have long been following this MEP discussion and for a year I have been saying, if we’re going to get any legislation any time soon outside of pension funding relief, it will be in regards to open MEPs. I still believe that. MEPs have a commonality of interest. There will be people who will not be happy, a whole bunch of people, and they’ll be talking with their members and asking what their concerns are. I hope it leads to consistency and a clear and fair rule about who can do what.

It may be that in six months or a year we have meaningful movement on federal legislation that will clearly define the playing field—and everyone can play in it. 

Compliance November 17, 2015

Is PBGC Driving Sponsors to DB Plan Exit?

One career actuary tells PLANADVISER unrelenting increases in PGGC premiums belie a lack of forward-thinking policy and are more likely to harm than help overall U.S. retirement readiness. 
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Following the debate and approval of the Bipartisan Budget Act in recent weeks, sponsors of defined benefit plans are facing the unsavory prospect, yet again, of dramatic increases in Pension Benefit and Guaranty Corporation (PBGC) default insurance premiums.

This newly programed series of increases comes on top of the significant premium hikes plan sponsors have already had to absorb in recent years, says Cammack Retirement Group Managing Actuary Art Scalise. Under the terms of the bipartisan budget accord, PBGC premiums are expected to reach up to $78 by 2019, far higher than they were just a few years ago, and the increased cost has many plan sponsors looking, more and more desperately, for an exit strategy, he says.

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The budget agreement provides that the single-employer fixed Pension Benefit Guaranty Corporation (PBGC) premium will be raised to $68 for 2017, $73 for 2018, and $78 for 2019, and then re-indexed for inflation after that. The variable rate premium would continue to be indexed for inflation, but would be increased by an additional $2 in 2017, and additional $3 in 2018, and an additional $3 in 2019.

Scalise says he has been in his role at Cammack for nearly three years, after spending 16 years working at Aon Hewitt, coming from the Aon side. Throughout that time the PBGC has slowly shifted from being perceived as an ally of the DB system to a major obstacle to its survival.

“It has undoubtedly become more difficult for plan sponsor clients to deal with PBGC premiums and requirements since I joined the industry,” Scalise tells PLANADVISER. “Especially in the market where I have had an opportunity to concentrate, which is health care systems, plan sponsors have become increasingly cash strapped. Right now they’re trying to figure out how to continue to fund their DB plan required contributions, which are also increasing on an annual basis. When you layer on the extra PBGC premiums each year, it’s taking a real toll on them.”

NEXT: Third time’s a charm 

Scalise observes this is the third round of announced PBGC premium increases “in something like a four-year period.”

“What’s worse, each time the premium hikes are put forward, they’re presented as the solution that will finally get the PBGC system to be sustainable and prevent the need for further hikes down the road,” Scalise explains. Years of conflicting messaging have left plan sponsors skeptical and embittered, “and they are clearly worried about what has been going on. Heading into the last month when additional increases were announced, PBGC premiums were believed to have been capped for the foreseeable future. The constant changes leave sponsors with no idea about where the DB plan environment is going.”

Also troubling, Scalise says, is the PBGC decisionmaking doesn’t exactly line up with wider market indicators.

“Sponsors have been doing their best at funding the plans, and many are putting in more money than required by law in the interest of getting ahead of the PBGC premiums and in the interest of the health of the plan,” he says. “From that perspective, and when one considers where markets and interest rates are going, I think this latest news took a lot of people by surprise.”

Part of the problem, as with other federal agencies, Scalise says, is that thinking and decisionmaking at PBGC is too closely tied to the current, short-term fiscal and economic environment. For a lot of plan sponsors, and the PBGC by extension, the current environment indeed looks pretty dismal from an asset versus projected liability perspective. But, as Scalise observes, we also know markets have been at historically low interest rates for a long time, and that plans’ funded statuses will almost inevitably bounce back as interest rates climb.

“What’s going to happen when interest rates start to rise for real and the liability the PBGC is reporting starts to dwindle significantly?” he asks. “What happens if rates rise enough to get plans close to 100% funding, what are you going to do with any excess monies? Do they refund it? Do they give credits to the plans somewhat? We don’t know what they will do.”

NEXT: The industry agrees

On Tuesday The Pension Coalition—which represents the pension-related interests of financial industry associations and individual companies across all major economic sectors—sent an open letter to lawmakers and the PBGC echoing many of Scalise’s arguments.

The letter urges lawmakers and regulators “to protect job-creators, workers, retirees, and their retirement security by opposing any further increases in premiums paid to the PBGC by sponsors of single-employer defined benefit plans.” It argues the recent premium increases “come on top of nearly $17 billion in premium increases already imposed over the last three years. In that same time, Congress has almost doubled the flat rate premium from $35 per participant to $64 per participant. The variable rate premium has also tripled from $9 per $1,000 of underfunding to $30 per $1,000 of underfunding.”

Annette Guarisco Fildes, president and CEO of the ERISA Industry Committee (ERIC), which is a founding member of the Pension Coalition, agrees that large employers have worked very hard in recent years and historically to create benefits plans that offer their employees the best options for their future.

“Increasing premiums only serves to hurt those employees and employers participating in defined benefits plans,” she says. “The most frustrating thing about this latest hike is that the PBGC’s own analysis does not call for an increase in premiums on single-employer defined benefit plans.”

National Association of Manufacturers Director of Tax Policy Christina Crooks highlights the fact that businesses are clearly already struggling with PBGC premium increases enacted over the past few years, “with nearly half of that amount being paid by manufacturers.” The additional premium hikes in the budget deal equate to a tax on employers, she adds, diverting dollars away from funding participant benefits, creating jobs and growing the economy.

The letter also argues that counting increased PBGC premiums as general revenue for purposes of budgetary scorekeeping is inconsistent with good governance and does not strengthen the nation’s retirement system. By law, PBGC premiums go directly to the PBGC, not to the Treasury and can only be used to pay benefits to plan participants and beneficiaries.

Read the Pension Coalition’s letter on ERIC’s website here.

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