Congress Weighs Last-Ditch Effort at Pooled 401(k)s

Proposed legislation could ease way for open, multiple employer plans

Stephen Miller, CEBS By Stephen Miller, CEBS July 24, 2018
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updated on Aug. 3, 2018

Two years ago, as the 114th Congress prepared to end its term, advocates for retirement-plan sponsors sought unsuccessfully to pass the Retirement Enhancement and Savings Act (RESA). The omnibus bill would have made 401(k) and similar plans less burdensome to administer, especially for small employers. While RESA addressed several compliance issues, its key provision was to allow unrelated employers to create defined contribution, pooled employer plans (PEPs), replacing more-restricted multiple employer plans (MEPs).

In September 2016, the Senate Finance Committee passed RESA with unanimous bipartisan support, but the bill never advanced beyond that point. Now, as the 115th Congress begins to wrap up, a revised RESA is again on the agenda.

In March, Reps. Mike Kelly, R-Pa., and Ron Kind, D-Wis.—along with 14 other Democratic and Republican co-sponsors—introduced H.R. 5282 in the House of Representatives. Its Senate companion, S. 2526, was introduced by Sens. Orrin Hatch, R-Utah, and Ron Wyden, D-Ore., the leaders of the Senate Finance Committee.

Full of 'PEP'

"A PEP is a new type of open MEP that is a single plan for [Employee Retirement Income Security Act] purposes," Pete Swisher, senior vice president of Pentegra Retirement Services, an advisory firm, wrote in a recent commentary.

PEPs can be thought of as the retirement-plan equivalent of association health plans. A PEP that covers fewer than 1,000 participants would be allowed to file a single-plan annual report with the Secretary of Labor, as long as no single participating employer has 100 or more participants covered by the plan.

Currently, there must be commonality among employers for them to be able to join in a single plan, meaning that the employers must be in the same line of business, such as auto dealerships participating together in a closed MEP. With a PEP, different employers would be able to pool together in an open plan that would allow them to share administrative costs and to reduce some of their compliance burdens.

"The law would enable [defined contribution] plan service providers to sponsor 401(k) plans and then invite employers to join," the Retirement Income Journal reported last month. "Importantly, employers would have fewer administrative chores, expenses and legal liabilities than they do when they sponsor a 401(k) plan themselves."

According to RESA, the IRS would issue model plan language, and the primary requirements to qualify as a PEP would be that it:

  • Must be run by a pooled plan provider (PPP).
  • Must designate one or more bank trustees who are not participating employers to ensure contributions are properly collected and remitted and to hold assets for safekeeping.
  • Impose no unreasonable restrictions, fees or penalties.

"Employers in a PEP remain responsible for prudent appointment and monitoring of the PPP and any other named fiduciaries," Swisher noted, and "employers also remain responsible for investment selection and monitoring to the extent not already dictated by the PPP or other named fiduciaries."

Significantly, the so-called "bad apple" rule, which says that a disqualifying defect by one participating employer disqualifies the entire MEP, is "effectively neutralized" under RESA, he noted.

RESA increases the tax credit for small-employer retirement plan startup costs and allows a tax credit for small employers that establish retirement plans that include automatic enrollment. Other RESA provisions seek to promote retirement savings by:

  • Easing reporting and disclosure rules.
  • Simplifying annual nondiscrimination testing rules.
  • Providing liability safe harbor protections for plan sponsors offering in-plan annuities.
  • Requiring plan sponsors to show an estimate of the monthly income a participant's balance could generate with an annuity.
  • Increasing the annual tax credit for small employers that start up a retirement plan from $500 to as much as $5,000 for three years and adding a new credit for those that adopt automatic enrollment.

In March, the Society for Human Resource Management (SHRM) co-signed letters to Congress urging support for RESA as "a proactive approach that will enhance the current [retirement] system." SHRM also stated in comments supporting RESA that the bill "encourages small employer retirement plan coverage, increases retirement savings, enhances worker participation and education, and facilitates retirement income security. … RESA is a proactive approach that will enhance the current system."

As for the legislation's prospects for passage, "There is some chance that it could happen this year because a number of Republican and Democrat senators really want to get it done," said Brian Graff, CEO of the American Retirement Association, which represents plan sponsors and service providers. "They see it as a [Sen. Orrin] Hatch legacy item before he retires in the fall."

[SHRM members-only toolkit: Designing and Administering Defined Contribution Retirement Plans]

Long-Sought Relief

Two long-standing retirement plan challenges that have vexed plan sponsors and which RESA would address are:

  • Liability concerns regarding in-plan annuities. "There has been a hesitation to add lifetime income options, such as deferred annuities, to defined contribution plans," explained attorney Dominic DeMatties, a partner with Alston & Bird's employee benefits and executive compensation team in Washington, D.C. Employers, for instance, are concerned about being sued for breach of fiduciary duties if the annuity provider they select faces problems years from now, and about what their responsibilities would be for ongoing monitoring and oversight of that provider.

    RESA would give plan sponsors "significant protections related to these fiduciary concerns, including a fiduciary safe harbor with respect to selection of the provider, which could result in increased take-up of [in-plan annuity] options as well as, ultimately, further innovation," DeMatties said.
  • Relief for frozen pension plans. As part of the transition from defined benefit pensions to 401(k)-type defined contribution plans, "many employers have closed their traditional defined benefit plans to new employees but continue to allow existing employees to accrue benefits under the plan, DeMatties said. "Over time, the group of employees that continues to accrue benefits under the traditional defined benefit plan generally becomes older and higher paid, which frequently can result in difficulty satisfying the tax code's nondiscrimination requirements," he noted.

    If certain conditions are met, "RESA would modify these nondiscrimination rules to permit older, longer-service, and generally higher-paid employees to continue to accrue benefits under a defined benefit plan, even though younger, shorter service, and generally lower paid employees do not accrue these benefits," he said.

'Mini RESAs' Introduced

Separate from RESA, four bipartisan bills introduced July 17 would simplify retirement plan compliance. These bills mirror key aspects of RESA in part, but their narrower focus could make passage easier, their backers believe.

The measures—sponsored by Sens. Cory Booker, D-N.J.; Tom Cotton, R-Ark.; Heidi Heitkamp, D-N.D.; and Todd Young, R-Ind.—were published in August and a summary of the bills was posted by the Washington, D.C.-based Bipartisan Policy Center, with these descriptions:

• The Small Business Employees Retirement Enhancement Act (S. 3219):

  • Eliminates the regulatory barriers that prevent small-business owners from joining professionally managed pooled employer plans.
  • Transfers some of the fiduciary responsibility from the employer to the pooled plan provider.

• The Retirement Flexibility Act (S. 3221):

  • Incentivizes plan sponsors to use automatic enrollment and automatic escalation of contributions to levels that are considered appropriate for the average saver while maintaining an opt-out option.
  • Provides flexibility on required safe harbor employer contributions that exempt plan sponsors from annual 401(k) nondiscrimination testing requirements.

• The Strengthening Financial Security Through Short-Term Savings Act (S.3218):

  • Limits early withdrawals from retirement accounts.
  • Facilitates short-term savings by allowing employers to automatically enroll their workers in emergency savings accounts in addition to retirement accounts.

• The Refund to Rainy Day Savings Act (S. 3220):

  • Allows individuals to commit to saving their tax refunds for later in the year.

"These four bills take commonsense steps to help more Americans gain access to workplace retirement accounts, save millions more for retirement, and build personal savings for emergencies," a statement from the Bipartisan Policy Center said.

Although the measures have bipartisan support in the Senate, "the challenge, of course, is finding a legislative vehicle for one or more of these proposals," according to an online commentary from October Three Consulting, a retirement plan advisory firm. Possibilities include congressional action on the multiemployer crisis or the next round of spending legislation, as the current spending authorization runs out Sept. 30, 2018, the analysts said.


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