Under Trump, Retirement Benefits to Be Tweaked, Not Transformed

Some long-sought changes may now move forward

Stephen Miller, CEBS By Stephen Miller, CEBS November 15, 2016
Under Trump, Retirement Benefits to Be Tweaked, Not Transformed

Much attention has been focused on how President-elect Donald Trump and the Republicans in Congress will approach health care benefits, but less has been said about the incoming administration's views on retirement benefits. That's because retirement savings, while critical for Americans' security and well-being, wasn't addressed much during the campaign.

"I closely followed this election cycle and was surprised at the lack of focus on retirement policy," said Will Hansen, senior vice president of retirement policy at the ERISA Industry Committee (ERIC) in Washington, D.C., which represents large employers. "We may quickly learn more about Trump's position once we see who will lead the regulatory agencies."

There are, however, a few key points to note concerning the Trump administration and retirement plan legislation and regulation.

Fiduciary Rule's Fate

"It is common that when the White House changes hands from one party to another, the incoming administration seeks to impose a moratorium on regulations that have not yet gone into effect," said James A. Klein, president of the Washington, D.C.-based American Benefits Council, which represents employers. "Even for those that are already in effect, the new administration may decide to hold off on active enforcement until they have reviewed them. This could then lead to new agency regulatory rule-making to revise or completely repeal the rules."

Donald Trump
Donald Trump Administration

For more information about Donald Trump's workplace policies and how they affect HR professionals, check out the SHRM resources provided below:

· SHRM's post-election coverage
· Trump's work policies · First 100 days

One likely target, Klein noted, is the Department of Labor's controversial rule to apply the fiduciary standard to those who provide investment advice to sponsors and participants in 401(k) and similar retirement plans and individual retirement accounts (IRAs). The rule takes effect in April 2017 and while it is directed at financial advisors, plan sponsors may need to revise contracts and compensation agreements with their advisory firms, and to review and amend plan documents, among other steps.

"The long-term viability of the regulations is at least once again in play," Andrew Oringer, co-chairman of law firm Dechert LLP's retirement income security and executive compensation group in New York, told TheWall Street Journal. "You really have to wonder whether the new fiduciary regulations will survive this historic election."

But others point out that Trump hasn't taken a position on the issue. "This rule is becoming effective within 80 days of when Trump becomes president," Marcia Wagner, a lawyer with the Wagner Law Group in Boston, told MarketWatch.com. "I would find it really hard to believe that he's going to spend any of his [political] capital on the conflict-of-interest rule in his first 100 days … not when he has so many other pressing issues."

Hansen is among those who don't expect Trump to move to repeal the fiduciary rule, but he does "expect a decrease in the number of new regulations that impact private retirement plans and other compensation practices" under the new administration.

Other than what the new administration might block, what might the Trump administration do proactively?

"The good news is that there are a number of retirement policy ideas that enjoy bipartisan support," Klein said. "The bad news is that there is no national retirement income policy against which to measure whether lawmakers are advancing or impeding a coherent vision." Past positions, however, suggest that "Republicans are more likely than Democrats to hasten the long-running transition from defined benefit to defined contribution plans," he added.

Protecting the Tax Exclusion

Many in Congress believe that the present tax exclusions for group health plan insurance premiums and retirement plan contributions adds mightily to the budget deficit, and so "employee benefits will certainly be in the crosshairs," Klein said.

"Those deductions are the two largest losses to the U.S. Treasury and a possible source of revenue going forward," said Kathleen Coulombe, senior government relations advisor at the Society for Human Resource Management (SHRM).

According to the House task force report on tax, released by House Republicans earlier this year, "The Committee on Ways and Means will examine existing tax incentives for employer-based retirement and pension plans in developing options for an effective and efficient overall approach to retirement savings." However, Trump has not not said if he would support or oppose limiting the tax exclusion for retirement plan contributions.

"SHRM supports legislative proposals that help employers to provide comprehensive, flexible and creative benefits packages for their employees," said Coulombe. "This includes encouraging and supporting retirement savings for employees through the preservation of the current tax structure and creation of tax incentives."

States Take the Lead

Based on the outcome of the elections for president and Congress, ERIC's Hansen believes there won't be a big legislative push in the retirement benefits space. "Neither side—Republican or Democrat—has a filibuster-proof majority in the Senate, which means compromise is still necessary to move forward with legislation," he noted.

Rather than action at the federal level, "the states will push forward with legislative proposals in the retirement and compensation area," he said, adding, "We will continue to see states implement state-run retirement plans" for private-sector employees who lack access to a plan through their workplace.

RESA in the Wings

One retirement-focused bill with bipartisan support is the Retirement Enhancement and Savings Act (RESA). The measure would allow unrelated employers to enter into so-called pooled employer plans (PEPs), replacing today's far more limited shared 401(k) multiple employer plans (MEPs), which require "commonality" among employers that partner in a single plan.

RESA also would make several modifications to the rules governing defined contribution retirement plans—some of which would give plan sponsors additional flexibility and long-sought compliance relief. For instance, the bill would:

  • Eliminate the annual notice requirement for safe harbor 401(k) plans with nonelective employer contributions.
  • Allow employers to adopt a 4 percent nonelective safe harbor contribution after the end of the year for the plan in the prior year.
  • Direct the Treasury Department to revise the hardship regulations to eliminate the requirement that an employee be prohibited from making elective deferrals and employee contributions for six months after receipt of a hardship distribution.
  • Allow earnings on elective deferrals, qualified nonelective contributions and qualified matching contributions under a 401(k) plan to be distributed on account of hardship.
  • Create a new fiduciary safe harbor for employers that opt to include a lifetime income investment option in their defined contribution plans.
  • Permit participants to make direct trustee-to-trustee transfers (or transfer annuity contracts) of "lifetime income investments" that are no longer authorized to be held as investment options under a qualified defined contribution plan.
  • Require employers to provide defined contribution plan participants with an estimate of the amount of monthly income that their accounts would yield during retirement if the assets were used to purchase an annuity. The estimate would be included on participants' annual plan statements.

On Sept. 21, the U.S. Senate's finance committee gave unanimous approval to the legislation, and sponsors were hopeful of the measure's eventual passage.

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

RESA Expected to Be Reintroduced in 2017

Update: While the Retirement Investment and Savings Act did not make it out of the Senate in 2016, Senate Finance Committee Chairman Orrin Hatch, R-Utah, indicated he will reintroduce the measure in 2017.

"In the new Congress, Chairman Hatch will work with members of the committee and Senate leadership to advance the bipartisan policies found in the [bill] that will assist employers, beneficiaries and hard-working Americans save the for the future," Senate Finance Committee spokesman Aaron Fobes told Investment News in December 2016.

Aid for Multiemployer Pensions

As for defined benefit pension plans, fresh efforts also underway to address the needs of critically underfunded multiemployer pensions, which are maintained under collective bargaining agreements involving more than one employer.

On Sept. 8, Rep. John Kline, R-Minn, who chairs the House Committee on Education and the Workforce, unveiled draft legislation to modernize the multiemployer pension system. The proposal would replace financially troubled multiemployer plans with composite plans that combine defined-benefit and defined-contribution features. For instance, these plans would provide a lifetime income stream in retirement through an annuity, like a traditional pension, but participants could see the amount of their payouts reduced if the plan isn't adequately funded.

Separately, legislation to provide federal support for the severely underfunded United Mine Workers of America (UMWA) pension plan still awaits congressional action.

As with the defined contribution proposals, these defined benefit measures could possibly be included in a year-end spending bill, although consideration in the next Congress may be more likely.

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

Relief for 'Frozen' Pensions

Also in the wings: the Retirement Security Preservation Act (RSPA), which would amend the nondiscrimination rules for defined benefit pension plans so that "frozen" plans, which no longer accept new participants, aren't penalized for favoring longer-serving and higher-paid employees. The measure has bipartisan support and awaits action by the Senate Finance Committee and the House Ways & Means Committee.

As new employees are hired who never participated in the frozen defined benefit plan, it becomes harder to satisfy the nondiscrimination rules because the existing participants are more likely to have greater tenure and to be highly compensated versus nonparticipating employees. This forces plan sponsors to terminate frozen plans instead of maintaining them, which was not the intended effect of the nondiscrimination rules, the bill's supporters say.

Trump's Initiatives

As for other savings initiatives, Trump has made expanding the use of health savings accounts (HSAs) part of his proposals for replacing the Affordable Care Act—but specifics about higher contribution limits or greater account flexibility are still to come.

The Trump campaign was more detailed when discussing his proposal to establish Dependent Care Savings Accounts (DCSAs) so that individuals can plan for future expenses relating to child and elder care. Annual contributions to a DCSA would not exceed $2,000 per year from all sources, with account holders' contributions excluded from taxes. Controversially, because of the budget implications, Trump proposed that the federal government provide a 50 percent match on DCSA account holders' contributions of up to $1,000 per year.

On Social Security, Trump said he would neither cut benefits nor increase payroll taxes and instead will spur faster economic growth to shore up the program's funding. While that campaign promise may mean no increase in Social Security FICA tax rates in the near term, many economists believe further action will be necessary, eventually, to address the program's growing deficits.

Related SHRM Articles:

Bill Could Add 'PEP' to 401(k) Multiple Employer Plans, SHRM Online Benefits, November 2016

Congress Weighs Aid for Critical Multiemployer Pensions, SHRM Online Benefits, September 2016

Employer Groups Critical of State-Run IRAs, SHRM Online Benefits, August 2016

How the Fiduciary Rule Affects Retirement Plan Sponsors, SHRM Online Benefits, April 2016

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