NAGDCA: Roth Catch-Ups Will Be Major Issue for Government Plans

This is the second time in three months the advocacy group has warned federal regulators and appealed for assistance.

The National Association of Government Defined Contribution Administrators has again asked in a public letter for greater leniency in implementing some SECURE 2.0 Act of 2022 provisions for government plans.

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The letter was addressed to the Department of the Treasury’s benefits tax counsel, Carol Weiser, and is signed by NAGDCA and other organizations such as the United States Conference of Mayors and the National Conference of State Legislatures. It states that the provision of SECURE 2.0 which requires enhanced catch-up contributions made by highly-compensated employees to be made to a Roth source and the requirement to provide a Roth option for employees making less than $145,000, are not ones many government plans will be able to comply with by 2024.

Many government plans do not have a Roth option, and others are bound by state laws and union contracts that must be updated to include the catch-up features, according to NAGDCA. The letter suggests that some plans may have to drop catch-ups altogether, something Congress presumably did not intend, until they can update their plan administration to accommodate Roth contributions.

“Some governmental plans will be forced to suspend all catch-up contributions until the necessary authority to offer Roth contributions can be added to their structure,” the NAGDCA letter stated. “Certainly, the inability to make catch-up contributions to a retirement plan during the crucial years prior to retirement would be counter to Congress’ goals of encouraging retirement savings.”

This the second time since March that NAGDCA has highlighted the issue, using the same terms each time.

Both requests ask the IRS for longer compliance periods and for guidance that good-faith attempts to comply with the law would be honored in the interim. Matt Petersen, executive director of the NAGDCA, says some public employers do not know who is a highly-compensated employee and who is not, since some employees might have multiple sources of income within a network of public institutions, such as a university system.

The letter also requested that the IRS issue guidance in anticipation of a legislative fix. Though not spelled out, this undoubtedly refers to the error in SECURE 2.0 which accidentally wrote catch-up contributions out of the law entirely.

SEC Head Gensler Says Reg BI Not ‘Check the Box’ Exercise

The SEC chairman made remarks about Reg BI, Reg BE and about AI’s role in the markets at FINRA’s annual conference.

Gary Gensler

The Regulation Best Interest rule overseeing how financial advisers make recommendations to clients cannot be treated as a “check the box” exercise, Securities and Exchange Commission Chairman Gary Gensler said at the Financial Industry Regulatory Authority’s annual conference on Tuesday. He discussed Reg BI and Reg BE, as well as artificial intelligence and what each means for advisers and broker/dealers.

Gensler took the chance to reiterate the SEC’s views on Reg BI to the audience of financial sector players just a little less than a month after the regulator put out renewed guidance on Reg BI that calls for advisers to gain a more detailed understanding of their clients and for ensuring a broad array of investment options.  On Tuesday, Gensler emphasized that advisers need to look at “more than suitability” and consider all costs and alternatives to be sure their advice is truly in their clients’ best interest, not merely an acceptable recommendation.

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The SEC head also made comments about the Regulation Best Execution rule, an SEC proposal made in December 2022 to establish a regulatory framework for the best execution of securities trading for brokers and dealers. FINRA President and CEO Robert Cook, asked Gensler why it was necessary for the SEC to propose a new Reg BE when FINRA, a non-profit overseen by the SEC, already has one.

Gensler responded by saying that Reg BE “is far too fundamental an area” for the SEC to not have it on its books. The SEC, as part of the “official sector,” should have its version of Reg BE and not “rely on a self-regulatory organization,” he said, adding that he was surprised the SEC did not already have such a regulation when he first joined the SEC.

During the conversation with Gensler, Cook recommended that listeners refer to SEC staff bulletins on Reg BI. These include one on conflicts, which highlights the need to mitigate conflicts and not just disclose them; and another on the Care Obligation, which urges advisers to consider the unique needs of each client and carefully consider alternatives.

At the Washington, D.C.-based gathering, Gensler also weighed in on the potential use of artificial intelligence in financial advising and how such development would be regulated. The SEC head said that predictive AI can help optimize a client’s best interest and can bring greater access to advice and offerings, but that implementation will depend on how the AI is programmed and trained. There are many factors that go into optimal investment advice, and if an AI platform is made to help a brokerage or adviser, then that can introduce new conflicts of interest, Gensler said.

There are currently no proposals to regulate AI, though the chairman did discuss the perils and potentials of AI at a hearing hosted by the House Committee on Financial Services in April, saying that the key regulatory interest in AI is from the perspective of a fiduciary—making sure the technology advances a client’s best interest.

Lastly, Gensler discussed the four market structure proposals that the SEC has brought forward during his tenure, which cover a broad range of issues in the equity markets and include Reg BE. Gensler referred to the proposals as an “important set of initiatives.” He said that the previous update of equity markets was in 2005, and economic and technological changes justify the proposals made in December 2022.

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