Tax Reform 2.0, RESA and Senator Hatch’s Retirement

In 2007, Utah’s senior Republican Senator Orrin Hatch became the longest-serving U.S. Senator in that state’s history, surpassing the previous record holder Reed Smoot.

By the time he retires in January 2019, Hatch will have served more than 40 years in Congress, finishing his career as the seventh-longest serving Senate member in U.S. history.

During his decades in office, Senator Hatch has often been called on both to craft and articulate the GOP’s positions on such complex topics as health care reform, entitlement programs, pensions and more. Back in January 2015 for example, from his position as majority chairman of the Senate Finance Committee, Hatch delivered a detailed policy rebuttal in anticipation of then-President Barack Obama’s State of the Union address, which was to include substantial discussion of the Affordable Care Act and the national expansion of Medicaid.

Though he reiterated his distaste for Obamacare and bemoaned a lack of common ground with Congressional Democrats on entitlement reforms, Hatch at that point still pledged firmly to work in a bipartisan fashion to improve the financial outlook of the United States. He also expressed willingness to work with any president or Congressional colleague on U.S. financial policy—and said it will be critical for the lasting health of the U.S. economy to maintain the bipartisan and cooperative character of the Senate Finance Committee. 

Since that speech, the senator has in fact worked in an earnest bipartisan manner—at least on retirement issues. As a prime example, Hatch in the last year helped to establish the bipartisan Joint Select Committee on the Solvency of Multiemployer Pension Plans. The Bipartisan Budget Act of 2018 set aside funding for the committee and required that it hold regular public hearings, and vote on its findings and legislative recommendations no later than November 30, 2018. If approved, those recommendations will be submitted for consideration by the House and Senate. The committee is to be dissolved no later than December 31, 2018.

Other recent examples of bipartisanship include the March 2018 reintroduction by Senators Hatch and Finance Committee Ranking Member Ron Wyden, D-Oregon, of the Retirement Enhancement and Savings Act, known fondly by the industry as “RESA.” RESA includes a proposal for pooled employer plans (PEPs), also called open multiple employer plans (MEPs). The sweeping legislation would treat open MEPs as one plan under the Employee Retirement Income Security Act (ERISA) and take care of the “one bad apple” rule to prevent one participating employer from disqualifying the whole plan.

In a word, the RESA legislation is ambitious, covering a laundry list of proposals that are broadly supported by retirement industry stakeholders. These include a proposal to require lifetime income estimates at least annually on participants’ retirement plan statements; a fiduciary safe harbor for the selection of lifetime income providers for retirement plans; a proposal to allow more time for participants who terminate with an outstanding loan to rollover the loan and pay it off without it being a deemed distribution; as well as other proposals that would affect nondiscrimination rules, the automatic enrollment safe harbor default rate and the treatment of 403(b) custodial accounts upon plan termination. In advocating for RESA, Senator Hatch has stressed the proposal is the result of “rare bipartisan cooperation by members from both sides of the aisle that will assist employers, beneficiaries and hard-working Americans.”

Hatch’s impeding retirement raises the question of whether RESA can succeed without the direct backing of the chair of the Senate Finance Committee. What is clear is that many of the proposals in RESA would represent a big step in addressing the retirement planning challenges cited by both employers and employees.

Need for Congressional action is clear

As highlighted in a recent survey report published by the Transamerica Center for Retirement Studies, “Striking Similarities and Disconcerting Disconnects: Employers, Workers and Retirement Security,” only 16% of employers are very confident their employees will achieve a financially secure retirement, and just 18% of workers share the same view. Overall just 65% of employers offer a workplace retirement plan, such as a 401(k), the survey shows.

Asked why they do not offer a plan, 58% say they are not big enough to do it alone, 41% say they are worried about the cost, and 22% say their employees are not interested. Among those not offering a plan, 25% say they would seriously consider joining an open multiple employer plan offered by a reputable vendor that handles the fiduciary and administrative duties at a reasonable cost. This last figure shows the need for legislation like RESA, experts agree.

Among the many advocates of RESA is Rich Rausser, senior vice president, Pentegra Retirement Services.

“There are various reasons why MEPs are not more widespread, but for our purposes here one of the most important ones is that commonality requirement,” Rausser observes. “RESA contains a multitude of provisions, but one particular component caught my eye. If passed, it would reintroduce the pooled employer plan, or PEP, also known as an open MEP, to the conversation.”

Rausser offers a little history lesson about Senators Hatch’s push for RESA. As he explains, a previous version of the bill was reported out of the Finance Committee in September 2016 “with an unprecedented, unanimous vote of 26 to 0.” However, in the wake of the 2016 presidential election, legislative priorities were significantly reshuffled and RESA ended up somewhere towards the bottom of the deck. Rausser notes that a House version of RESA was introduced this year by Representatives Ron Kind, D-Wisconsin, and Mike Kelly, R-Pennsylvania.

“What are the chances of RESA being passed this time around, as opposed to when it first surfaced in 2016? Pretty good, from what we hear from industry insiders,” Rausser suggests. “Such groups as the Insured Retirement Institute, the American Council of Life Insurers, and the American Association of Retired Persons have all expressed support for its passage. But we will have to see how it all unfolds.”

Other members have their own proposals

While the next Congress will lose in Hatch a prominent voice on retirement issues, there are other members of the House and Senate making their own policy pushes outside the Retirement Enhancement and Savings Act.

Among the retirement reform proposals submitted during the current session by House Ways and Means Committee Ranking Member Richard Neal, D-Massachusetts, is the Retirement Plan Simplification and Enhancement Act. The bill is tied to another published this term by the Democrat from Massachusetts, the “Automatic Retirement Plan Act,” which also garnered the support of retirement plan industry lobbying groups. Very broadly speaking, the Simplification and Enhancement Act includes provisions aimed at expanding retirement plan coverage and increasing savings levels, preserving lifetime retirement income, simplifying and clarifying qualified retirement plan rules, and implementing a more limited set of defined benefit (DB) plan reforms.

The bills seek to eliminate the current 10% cap on automatically-increased deferral rates of employees who are automatically enrolled in a plan. Related to this, the bills would require the Treasury Department to issue regulations or guidance “simplifying the timing for providing notices to automatically-enrolled employees; in particular, in plans that permit immediate participation, or that have multiple payroll systems.”

Neal’s bills would require employers to expand retirement coverage in a variety of ways. Perhaps most significantly, employees who work for three consecutive years with at least 500 hours of service each year would have to be made eligible to participate in an employer’s plan, but would be excluded from coverage, top-heavy, and nondiscrimination testing. Further, when determining the top-heavy status of any of its plans, an employer “may exclude participants who have not yet met the minimum age and service requirements (age 21 and 1 year of service) if the employer satisfies the top-heavy minimum contribution separately for those participants.”

Beyond these bills, Representatives Kind and Dave Reichert, R-Washington, senior members of the House Ways & Means Committee, reintroduced their Small Businesses Add Value for Employees (SAVE) Act. Among other things, the SAVE Act would make changes to existing SIMPLE IRA and SIMPLE 401(k) retirement plans, allow for open multiple employer plans and ease other requirements to make it easier for small businesses to offer plans to their employees.

Thoughts about an uncertain future from policy pros

Asked for his broad thoughts about U.S. retirement policy at the federal level, Ed Farrington, the head of retirement at Natixis, says the U.S. has basically been treading water for a decade—since the passage of the Pension Protection Act. He is strongly in the camp supporting Senator Hatch’s proposals, and many aspects of the various House bills aforementioned.

“There is no question that we can do better on a policy level,” Farrington says. “We have been thinking about and talking about the same challenges for 10 years, and there is actually quite a lot of consensus on some next steps. Everyone seems to like the idea of open multiple employer plans, as a prime example.”

Farrington recalls being invited by Senator Hatch some five or six years ago to speak on a panel at a retirement policy summit.

“He got a bunch of industry folks together in a very open and bipartisan way to share all these ideas [in RESA]. At the time we all felt great about the possibility for near-term action, but here we are years later in the same position. It feels like politics is stopping policy, frankly, even in areas where there is strong bipartisan consensus. If we don’t address these problems now they will come home to roost.”

Christopher Spence, leader of retirement industry advocacy for TIAA, also stands firmly in the camp supporting RESA. Asked for his thoughts about the impact Senator Hatch has had on the retirement industry, Spence says the influential senator’s voice on retirement reforms will certainly be missed.

“I don’t think it is overselling RESA to say that it would be the biggest change to retirement policy in many years, certainly since the Pension Protection Act,” Spence observes. “From my perspective as an industry lobbyist it is our North Star right now. There is strong consensus that the bill would really build on what the Pension Protection Act accomplished. I can’t name a single person I interact with in the retirement industry that is opposed to passage.”

In fact, it’s not just the retirement industry advocating for RESA, Spence suggests.

“There is a coalition that obviously includes the retirement companies and the asset management companies, but we also are joined by church groups, by the Boy and Girl Scouts of America, and by groups like the National Rural Electrical Co-op Association,” he explains. “There are a lot of different factors in the bill that would be helpful to a lot of different groups.”

Overall, Spence is still optimistic about RESA, even with Senator Hatch’s looming retirement.

“Before the House left for the current recess, we were hearing more and more discussion of Tax Reform 2.0,” he notes. “Part of the framework that House leadership has put out has to do with ‘family savings.’ We are tentatively expecting that, if and when this bill takes shape, a lot of RESA may be incorporated.”