Focusing on the Bigger Picture

The devil may be in the details, but they occur against a bigger backdrop. At a Feb. 7 session of the 2022 NTSA Summit in Phoenix, American Retirement Association Chief Content Officer Nevin Adams offered attendees a look at some big picture “seismic shifts” affecting the retirement industry. 

Legislation

We are “on the precipice of seeing action this year” on key legislation that will affect the industry and participants, said Adams. Among those measures are the Securing a Strong Retirement Act of 2020 (SECURE 2.0) and the RISE Act. 

SECURE 2.0 would: 

• expand auto-enrollment by enrolling employees automatically in their company’s 401(k) plan when a new plan is created;
• increase and “modernize” the existing Saver’s Credit for contributions to a retirement plan or IRA;
• allow 403(b) plans to join together to offer retirement plans to their employees in multiple employer plans (MEPs);
• allow a higher catch-up limit to apply at age 60 (from 2020’s $6,500 to $10,000) and raise the SIMPLE plan limit from $3,000 to $5,000;
• increase the required minimum distribution age to 75;
• allow individuals to receive an employer match in their retirement plans for paying down a student loan;
• provide a safe harbor for corrections of employee elective deferral failures; 
• expand the Employee Plans Compliance Resolution System; and
• make it easier for employees to find lost retirement accounts by creating a national online database of lost accounts (to be managed by the PBGC).

The RISE Act would: 

• establish an online “Retirement Lost and Found” database at the Department of Labor to help workers locate their retirement savings as they move from job to job; 
• expand the SECURE Act’s open MEP provisions to allow unrelated public education and other non-profit employers to join a 403(b) MEP;
• increase the balance limit from $5,000 to $7,000 for employers to transfer former employees’ retirement accounts from a workplace retirement plan into an IRA;  
• permit employers to offer de minimis financial incentives, such as low-dollar gift cards, to boost employee participation in workplace retirement plans;  
• reduce from three years of service to two the requirement for part-time workers to participate in an employers’ retirement savings plan; and 
• simplify and clarify reporting and disclosure requirements related to retirement plans.

Adams noted that there is some overlap between SECURE 2.0 and the RISE Act, and that that is deliberate. One reason is that it provides “an opportunity for everyone to put their cards on the table.” In addition, he said, there are members of Congress who have indicated that they plan to retire this year and have their “fingerprints” on legacy legislation. 

Adams also noted that there is legislation that concerns collective investment trusts (CITs), which he said are receiving a lot of focus and “could be a game changer.” In addition, the RISE Act would broaden the scope of the SECURE Act’s pooled employer plan (PEP) or open MEP provisions to allow unrelated public education and other non-profit employers to join a single 403(b) plan.

ESG

Environmental and Social Governance (ESG) investing is “out there and it’s an issue,” said Adams. He noted that:

• ESG funds have a long history with nonprofits, notably church plans and state programs (some of the latter already have ESG mandates, in fact).
• More than a third (37.7%) of 403(b)s already have an ESG option, versus just 3% of 401(k)s.
• 53% of 403(b)s with more than 1,000 participants have an ESG feature.

“The question,” Adams said, “is whether the Department of Labor’s final rule on ESG funds will bump the contribution levels higher.” 

DOL Fiduciary Rule

The DOL fiduciary rule, which has been bandied about since October 2010, is still a concern today. “Last week, just as the new fiduciary rule came into effect, boom! More uncertainty into our lives,” remarked Adams. 

Adams noted that the 1975 five-part test for “fiduciary” status has been reinstated, but with new commentary on rollover advice and other matters. In addition, new and interpretive positions extend the reach of the that test, particularly in the rollover setting. 

And, he said, remember that the test applies to IRA rollovers. The DOL has tightened the circumstances in which it will consider rollover advice to be fiduciary “investment advice,” under a new interpretation of the five-part test. Under the exemption, a fiduciary must provide written disclosure of the reasons that a rollover recommendation is in the investor’s best interest. 

The final rule also added a self-correction program which provides that no prohibited transaction occurs if, among other conditions: 

• there is no investment loss; 
• the investor is made whole; and
• the advice fiduciary corrects the violation within 90 days and notifies the DOL within 30 days of the correction.

Adams noted that there has been “whiplash” in part due to changes in administrations that have been more frequent than in previous decades. “Elections have consequences,” he added. 

Litigation

Litigation is another important factor Adams cited as affecting the industry. He noted that 2020 was a record year for litigation, and that 2021 was another busy one, especially regarding settlements. Issues included: 

• multiple recordkeepers; 
• active management; 
• revenue-sharing;
• loan practices; and 
• restrictive and/or proprietary funds

The most important things to keep in mind regarding litigation, said Adams, are that: 

• Litigation continues, and while large plans have been getting headlines, “copycats” are taking the arguments downmarket.
• Supreme Court rulings will only fan those fires, “and  they didn’t need much” encouragement, he said.
• Plan governance continues to be a major focus and concern.
• Prudent process and documented review are key, but a prudent process “is what really matters,” Adams remarked. 

Consolidation

Consolidation from the 401(k) world “will probably creep to 403(b)s,” said Adams. And this, he said, has implications for choice, fees, revenues, quality, service and support.

The Great Resignation

COVID has had a “weird, disproportionate effect” on various industries, Adams said, and the retirement industry “is taking it on the chin.” In addition, he said, the nonprofit sector has been hit hard by COVID, “harder than most.” Attracting new professionals and retaining them “are going to be more important than ever before,” he said.