Compliance May 30, 2024

ERIC Lays Out Its IRS, Treasury Priority Areas

A letter from the ERISA Industry Committee lays out recommendations for its 2024-2025 Priority Guidance Plan for regulators including retirement and health care benefits.

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The ERISA Industry Committee, a national trade group representing corporate benefit leaders, has weighed in on key priority areas for coming years, including initiatives from the SECURE 2.0 Act of 2022 in retirement savings, such as student loan matching contributions and clarity on automatic enrollment mandates.

James Gelfand, president and CEO of ERIC, on Thursday released a letter on behalf of large employer member companies regarding Notice 2024-28 that guides priorities for the U.S. Department of the Treasury and Internal Revenue Service. The letter included agenda items focused on clarification and guidance on benefit health issues, such as health savings accounts and high-deductible health plans and retirement and compensation benefit issues.

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“In the case of each of these recommendations, and pursuant to Notice 2024-28, ERIC believes that the guidance requested above would resolve issues affecting broad classes of taxpayers, including employee benefit plans, plan sponsors, and plan participants,” Gelfand stated in the letter. “The recommended guidance would address several unanswered questions and also reduce burdens.”

The focus areas and recommendations pertaining to retirement savings include:

Matching Contributions for Student Loan Payments and Other Contributions

Section 110 of the SECURE 2.0 Act allows employers to match employee student loan payments, which ERIC would like to encourage companies to offer. To that end, it calls on the Treasury and IRS to clarify “reasonable procedures” for employees to claim the match and address the certification of loan payments to prevent fraud. Additionally, it called on regulators to consider extending matching contributions to other tax-preferred accounts like Section 529 plans or HSAs.

Catch-up Contributions

Beginning on January 1, 2026, individuals earning over $145,000 annually can only make catch-up contributions on a Roth basis as per SECURE 2.0. ERIC noted that it had submitted detailed comments in October 2023 ahead of the initial earlier deadline of 2024, which sought clarification on various aspects including the flexibility of plan sponsors regarding catch-up contributions. They also inquired about the voluntary nature of SECURE 2.0 catch-up limit increases for plans. ERIC is seeking additional guidance on non-discrimination rules, treatment of new hires, and the “mechanics of participant deferrals.”

Clarify the Automatic Enrollment Mandate Exemption for Existing Plans

SECURE 2.0 mandates certain employer plans adopt automatic enrollment from 2025, exempting existing “grandfathered” plans, ERIC notes. IRS Notice 2024-2 clarified that a plan is established upon initial adoption of terms. However, ERIC is seeking further clarification to confirm that plan changes, except for mergers or spinoffs, don’t trigger the mandate. Additionally, in multiple employer plans, ERIC believes the IRS should specify that a pre-enactment plan merged into a post-enactment multi-employer plan retains its pre-enactment status.

Optional Roth Match

SECURE 2.0 allows employers to enable employees to request Roth-based matching contributions. Notice 2024-2 clarified that offering Roth features doesn’t mandate all Roth contribution types. However, for plans with Roth matching or nonelective contributions, ERIC calls on the IRS to confirm the feasibility of “partial Roth” elections. It also calls on them to allow Roth treatment as the default for matching and nonelective contributions, regardless of vesting status. ERIC believes limiting Roth options to fully vested participants contradicts the statute’s nonforfeitable requirement for Roth contributions, without indicating such limitations in statutory language, and calls for clarity.

The letter goes on to seek clarity in several other benefit areas, limiting unneeded notice and disclosures to participants, clarifying long-term part-time eligibility rule changes, and increasing flexibility around employees using high-deductible health plans and health savings accounts.

The letter is available here.

Data & Research May 30, 2024

Investor Shifts Herald ‘Irreversible Decline’ for Mutual Funds

A Broadridge study shows the continued shift away from mutual funds to ETFs and stocks by individual investors; separate Simfund data shows total outflows year-to-date.

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The decline in mutual fund use appears set to continue across both retail and institutional investors, according to a recent Broadridge Financial Solutions study and flow tracking from data and insights provider Simfund.

For its part, Broadridge recently released results of a retail investor analysis that mined the activity of more than 40 million individual U.S. investors across investment vehicles, including mutual funds, exchange-traded funds and individual equities. When considering asset ownership by product as a percentage, mutual funds (38%) for the first time fell below stock holdings (39%), while ETFs continued a steady climb to reach 23% of assets.

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“The mutual fund space has long-term threats—there’s no disguising the decline,” says Andrew Guillette, vice president of global insights at Broadridge. “Mutual funds used to be more than half of investments in 2018, and now they’re below equities …. That shift has been rather dramatic, especially among the younger generations.”

Among retail investors, the shift away from mutual funds is partly the well-known story of cost savings, with ETFs providing lower-cost, tax-efficient investment options. But another key factor is the rise of more personalized investment options seen in separately managed accounts, model portfolios and direct indexing, Guillette says.

“When advisers put fees together, every basis point saved is a point earned,” he says.

Eroding Asset Class

In its report, Broadridge noted that mutual funds are facing an “irreversible decline” among retail investors.

Baby Boomers hold the most mutual funds as a percent of assets at 39%. That doesn’t fall off too far for Gen X (37%), Millennials (36%) or Gen Z (37%). But those cohorts do show greater asset allocation to ETFs as compared to the Boomers, according to Broadridge’s study.

In the defined contribution space, the shift away from mutual funds has been playing out similarly in large part due to the rise of collective investment trusts.

CITs, which have less regulation to contend with, can offer target-date fund investing at lower costs to DC plan sponsors. As of March, Morningstar pegged CITs as representing 49% of the in-plan target-date market, putting them on track to overtake mutual funds this year.

In a separate analysis of long-term mutual funds, business intelligence firm Simfund shows net monthly outflows for every month but for two dating back to the start of 2022.

In 2024, its data shows total net outflows of about $38 billion, with April seeing the largest asset loss for mutual funds at $41.9 billion.

The outflows were countered by one month of inflows, with February clocking a positive $15.7 billion and showing that mutual funds certainly still have their place in the market. Simfund, like PLANADVISER, is owned by ISS STOXX.

Equities Rising

Broadridge’s investor deep dive survey, Guillette says, gives rare granularity on where individual investor assets sit across age, gender, and a host of other factors.

One surprising result of the study, he notes, is the rise of equities in investor portfolios. The 39% of equities among investor portfolios represents a 10-point jump from five years ago.

Broadridge’s report notes the increase of online brokerage use among investors contributing to the increase; a trend that stemmed in part from the pandemic and the rise of trading platforms, such as Robinhood.

But Guillette is quick to point out that investment via advisers is still much more common and looks to be holding steady: when considering asset ownership, 77% of Broadridge’s investors have received financial advice and just 23% identify as self-directed.

The study, he says, shows opportunities for asset managers and advisers to continue to find ways of personalizing products and offerings to take advantage of the trends.

“It’s interesting that, as sophisticated as we are as an industry we don’t know the end retail investors very well,” Guillette says. “Our viewpoint is that investors are diverse, and more and more investors want a personalized experience, so understanding the nuances is important input in terms of building scale for the industry.”

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