American Retirement Association CEO Brian Graff unveiled plans April 15 to address the expensive and outdated ERISA requirement to disclose information to 401(k) participants in paper form.
“Today the American Retirement Association is starting a campaign to finally get the 401(k) disclosure rules changed so that electronic delivery can be the default,” Graff announced at the opening general session of the NAPA 401(k) Summit in Nashville.
The ARA’s proposal would essentially flip the current orientation of the Department of Labor’s ERISA regulations, which emphasize providing paper disclosures — including the Summary Plan Description (SPD) and Summary of Annual Report (SAR) — to plan participants but include a safe harbor permitting electronic delivery to certain types of participants with online access. To utilize the safe harbor, however, plan sponsors using electronic delivery must solicit participants’ consent to e-delivery, track their responses, store their e-mail addresses and monitor delivery of the disclosures — an administrative headache that constrains the use of e-delivery.
The ARA would make e-delivery the default method and retain the paper option. “Anyone who wants to get paper will have the option to do so,” Graff explained.
The ARA and NAPA recently partnered with the Investment Company Institute to examine the economic impact of the current 401(k) disclosure regime, Graff noted. “This just-completed study shows that approximately $500 million a year is unnecessarily spent on these disclosures,” he said. Based on the average 401(k) account balance, that equates to 2.5% in lost retirement savings over a participant’s working life. “By having electronic delivery be the default for 401(k) disclosures, we will save the 401(k) system hundreds of millions — meaning more retirement savings for working Americans,” he said. The study will be shared with members of Congress this week, Graff added.
Graff noted that the federal Centers for Medicare and Medicaid Services, the Social Security Administration and the retirement plan for federal employees all utilize e-delivery as the default for communicating important information. “If it’s good enough for Medicare and Medicaid and the Social Security system, it should be good enough for the 401(k) system,” Graff declared.
Despite the common-sense ideas embodied in the ARA proposal, retirement professionals should expect opposition to it, Graff added. “This should be a slam dunk, right?” he asked. “Well, there will be opposition. AARP will raise concerns and there will be opposition from — you guessed it — the paper industry. They already have a website protecting their interests — check it out at paperoptions.org.”
The e-delivery default idea does enjoy support in Congress. Late last year, bipartisan legislation that would allow for e-delivery of pension and retirement plan information was introduced in the U.S. House of Representatives by Rep. Jared Polis (D-CO) and Rep. Phil Roe (R-TN), along with 26 cosponsors. The “Receiving Electronic Statements to Improve Retiree Earnings (RETIRE) Act” (H.R. 4610) would allow plan sponsors to auto-enroll participants in an e-delivery option for plan communications, while providing an opt-out option for employees who prefer to receive paper documents.
In addition to previewing the ARA proposal, Graff also updated Summit attendees on three hot-button issues: the push for state auto-IRA plans, the possible impact of this fall’s congressional election on the retirement industry, and pending legislation that includes several provisions beneficial to retirement professionals.
Coverage Gap and the State Solution
Noting the impact of the current 5-year rise in the stock market on American investors’ wealth, Graff turned to the need to do something for those who have been left out. “Unfortunately, too many working Americans are not benefiting from this extraordinary growth in the market — 38% of those working are not participating in this growth,” he said. “Chiefly that is because they don’t have access to workplace savings program.”
The good news, he said, is that when moderate-income workers do have access to a 401(k) plan, they are 12 times more likely to save for retirement than they would be on their own in an IRA.
Nonetheless, Graff noted, according to the Department of Labor, the percentage of private-sector workers participating in either a DB or a DC plan has remained essentially unchanged — at around 40% — since the DOL began tracking that metric in the 1970s, just a few years after the enactment of ERISA. “Now, some may say the [percentage] should be a little higher — let’s say 60%,” Graff said. “But it’s still flat, and that still means 40% of the workforce doesn’t have a plan — that’s 40% of the workforce that isn’t going to save for retirement.” Increasing access to coverage in a retirement savings plan “is the next big policy issue,” Graff declared. “The 401(k) isn’t the problem — it’s that there are too many working Americans without one.”
This coverage gap, Graff explained, has led to a proliferation of proposals at the state level to expand retirement plan coverage in the private sector. Some, like California and Oregon, have a mandate with a government-run default, he noted; some are looking into creating 401(k) MEP for employers in their state; and others have created a marketplace for small businesses to find a plan provider or are working on one.
“We believe 50 different ideas from 50 different states is a mighty mess,” Graff declared. “And it is inching closer to the time for a national, federal solution.” Going forward, he said, NAPA will be advocating solutions to avoid that problem and protect advisors’ interests.
Capitol Hill Update
Turning to Capitol Hill, Graff addressed the possibility of the Democrats regaining control of the House of Representatives in the upcoming mid-term elections, as well as the possible impact of that on the retirement industry. Noting that Massachusetts congressman Richie Neal is currently the ranking Democrat on the House Ways & Means Committee, Graff said that means that if the Democrats do regain control the House in November — “a very real possibility with Paul Ryan’s recent retirement announcement,” he noted — Neal would become the Chairman of the powerful tax-writing committee.
So where does Neal stand on retirement issues? As Graff explained, Neal introduced a “massive, game-changing” national retirement plan coverage proposal in March called the Automatic Retirement Plan Act (ARPA). Under Neal’s bill:
- All employers that have more than 10 employees and have been in business for at least three years would be required to provide an automatic enrollment 401(k) plan.
- After a 5-year transition period, all employees over age 21, including part-time workers, would have to be covered after no more than 3 months of service (plans would no longer be subject to the current 70% coverage rule).
- No employer contributions would be required in the minimum plan, which would be a safe harbor plan with no testing.
- Auto-enrollment would start at 6%, with annual auto-escalation of 1% up to 10%.
- Plan accounts would be portable, but 50% of the account balance would have to be distributed in the form of a lifetime income vehicle.
The bill would also change ERISA’s coverage rules — not just for the minimum plan, but for all existing plans, Graff noted.
“Fortunately, none of these big ideas are going to happen this year,” Graff advised attendees. However, he continued, “there is a chance for open MEPS and a few other fixes that were included the Retirement Enhancement and Savings Act (RESA) that’s been introduced — amazingly, on a bipartisan basis — in both the House and the Senate.” In addition to open MEPS, the RESA legislation currently includes a fiduciary liability safe harbor for plan sponsors offering annuity options, a much larger tax credit for start-up plans and a credit for adopting auto-enrollment. According to Graff, “There is some chance that it could happen this year because a number of Republican and Democrat senators really want to get it done, and they see it as a [Sen. Orrin] Hatch ‘legacy item’ before he retires in the fall.”