Small Changes to the DC Framework Could Pay Dividends

A new DCIO Insights report from Neuberger Berman argues the current system of workplace defined contribution (DC) savings via payroll deductions protected by the Employee Retirement Income Security Act (ERISA) has sufficient power and flexibility to address the critical challenges ahead—especially if lawmakers can step up and make a few easy-but-necessary fixes.

Michael Barry, president of the Neuberger Berman plan advisory services group, and Michelle Rappa, head of defined contribution marketing, penned the report. They suggest leaders in Congress and across private industry have expressed the clear need to provide more support to workers hoping to do the responsible thing and save for retirement. Both groups, business leaders and lawmakers, naturally have an interest in promoting workers’ financial wellness and in protecting peoples’ future financial independence.

And so, the current moment seems like the natural environment for meaningful retirement-focused reform that could help the DC system function even better, the experts write, for example by creating new safe harbors to encourage employers to offer structured retirement income products under the protective umbrella of ERISA. Or lawmakers could create space for the establishment of non-nexus multiple employer plans (MEPs) that would allow otherwise unrelated small businesses to pool their resources when first establishing tax-advantaged DC savings and investing options for employees.  

These are all ideas that have been kicked around recently by Congress, Barry and Rappa observe, and both enjoy support from both sides of the aisle. Yet the proposals are far from a slam dunk: Given the tumultuous political environment it is very difficult to assess the short-term prospects even for these popular initiatives, the experts warn.

“As we see it, our current DC system presents three fundamental policy challenges,” the pair writes. “1) Getting adequate contributions into the system by providing workplace, auto-enrollment retirement savings vehicles to all American workers that default to an adequate contribution rate. 2) Investing those contributions efficiently by encouraging (again, through defaults) appropriate asset allocation decisions and reducing the cost of investment. 3) Distributing DC benefits in a way that adequately allows for longevity risk (the risk that a participant might outlive his/her retirement savings).”

That last policy challenge is perhaps the most difficult to achieve, Barry and Rappa predict. “Unlike traditional annuity-based defined benefit plans, where participants can see what their expected monthly distributions in retirement will be, DC plans are total account-based—meaning that participants see only the full amount of their 401(k) account balance on their statements. Consequently, policymakers, providers and sponsors have had difficulty getting DC participants to think of their account balances in terms of periodic retirement income distributions and to make appropriate decisions on that basis.”

NEXT: Retirement policy and federal revenue 

Barry and Rappa note that much of the retirement policy discussion and legislation in recent Congresses—including interest rate stabilization relief and increases in Pension Benefit Guaranty Corporation (PBGC) premiums for single-employer defined benefit plans—has been driven by a need to raise tax revenues for unrelated spending.

“In this regard, we note that both Hillary Clinton and Donald Trump have advocated increased spending on infrastructure,” they warn. “In that context, perhaps the biggest 2017 policy question will be whether Congress (and the new administration) will continue this practice of modifying retirement policy simply to finance unrelated spending or whether they will address retirement policy on its own terms. There is of course a third alternative—neglect.”

Barry and Rappa further observe that federal-level proposals have generally been opposed by Republicans. 

“In response to this opposition, some states—including California, Connecticut, Illinois, Maryland and Oregon—have passed laws intended to establish mandatory payroll-deduction auto-IRAs at the state level. The Obama administration has generally been supportive of these state efforts, and recently finalized a regulation providing a path forward for them,” the paper explains. “One critical questions for 2017: If the new administration is Democratic, will it make auto-IRAs a legislative priority? If Republicans still control at least one house of Congress, will they continue to oppose these proposals?”

Other questions from Barry and Rappa include: “Will sponsors, concerned about the possibility of different, multiple state auto-IRA regimes, support some sort of federal/national solution? Or will a new Democratic administration put most of its effort/political capital into supporting state retirement plan efforts? Finally, if the new administration is Republican, how will it address this coverage issue?”

NEXT: Other important policy considerations 

Speaking recently at the 2016 PLANADVISER National Conference, David Levine, a principal with Groom Law Group who specializes in ERISA plan issues, agreed with many of these themes and posed similar questions.

“There is a part of Congress that has an interest in driving real change here, I believe,” Levine said. “But that said, we are caught in the crossfire at this point like so many other industries and interests. There are members of the House and Senate who really care and who are willing to work across the aisle, but it is simply not enough to break the deadlock. We live in a dysfunctional world.”

Looking back on the last two years, Levine suggested the only real changes have “related more to the pension side of the business and to pulling more revenue from the retirement space to fund new spending bills.” There has been a lot of talk about a lot of other issues, he said, but otherwise very little action.

“These changes were not explicitly related to 401(k) or DC,” Levine noted. “The only bills explicitly related to 401(k)s that have been acted on with any sense of urgency were the attempts to stall the fiduciary rule, and those really went nowhere because the Democrats closed ranks behind the president.”

Levine, like Barry and Rappa, went on to conclude that he “is not completely a cynic. I do think there is some opportunity for reform beyond taking more from plans and participants in the form of taxes.”

“This will sound random, but we could see reform tacked on to changes being considered to support the United Mine Workers pension plans,” Levine suggested. “There is a lot of political support for helping these people, who are facing real stability issues in their large multiple employer pension, which could then include other activity. Enhancements on auto features, clarifying hardships and loans, simplifying rollover processes, you name it. And of course, open MEPs are a hot topic right now and they probably have the most support of anything I’ve seen out there at this point.”