Is New Pension Law on the Horizon?
With the mid-term elections behind us, I see reason to be optimistic that a post-election pension bill could be passed by year-end. Two bills, the Retirement Enhancement and Savings Act (RESA) and the Family Savings Act, have broad support in Congress and could be folded into any year-end tax bill. Looking forward to 2019, Democrats may try to push legislation prohibiting mandatory arbitration of ERISA claims, and we can expect continuing state and federal efforts to fill the void left by the demise of the Department of Labor’s Fiduciary Rule. Here’s what may be coming for retirement plans and their fiduciaries:
RESA/Family Savings ACT
These similar laws would encourage retirement savings and simplify compliance for plan sponsors and fiduciaries in significant ways. The big change would be the authorization of open multiple employer plans (MEPs). These plans allow unrelated employers to pool their assets to obtain professional administration without having to file individual Form 5500s or have individual CPA audits of plan assets. Open MEPs are currently treated as separate plans rather than one, which is not desirable. MEPs are also subject to the “one bad apple” rule. This provides that a qualification problem with one employer’s portion of the plan can affect the qualification of the entire plan, penalizing the employers who are compliant. The proposed legislation would repeal the “one bad apple” rule, thereby overcoming another impediment to the adoption of these plans. The bottom line is that these changes to the MEP rules would make lower fees and professional plan administration available to smaller employers and encourage them to adopt new plans.
Other changes in these bills would:
- Encourage the annuitization of 401(k) plan benefits by establishing a statutory safe harbor. This would protect fiduciaries from liability when they prudently select an annuity provider and the provider’s financial condition deteriorates. They would also permit 401k participants to roll annuity contracts into IRAs to avoid surrender charges and other expenses.
- Liberalize the required minimum distribution rules.
- Require that participant account statements show the projected income that would be provided if the account balance were applied to purchase an annuity. This is included only in the Retirement Enhancement and Saving Act of 2018 (RESA).
- Create a universal savings account to which participants could contribute up to $2500 on an after-tax basis. Earnings and withdrawals from universal savings accounts for any reason would not be taxed. This is included only in The Family Savings Act.
The Supreme Court, in a case called “Epic Systems”, upheld mandatory arbitration of employment claims and class action waivers. Plan sponsors have tried to extend mandatory arbitration and class action waivers to ERISA suits to avoid expensive and time-consuming plan litigation. In July of this year, the U.S. Court of Appeals for the Ninth Circuit refused to uphold mandatory arbitration of a fiduciary breach claim under ERISA, stating that it was a claim on behalf of the plan, not individual participants. Other courts may come out differently. Democrats may push for legislation to limit or prohibit these provisions, and in the ERISA context, it can be argued that they undercut ERISA’s statutory remedies for participants.
The Fiduciary Rule was invalidated by the Court of Appeals for the Fifth Circuit, and was not appealed by the Trump Department of Labor. A new proposal, called Regulation Best Interest, from the SEC could partially fill the gap by covering advice from a broker to IRA depositors and plan participants, but it does not appear to be applicable to advice given to plan fiduciaries. We don’t know for certain that Regulation Best Interest will be finalized or what a final version would look like.
States had begun to take action to impose higher standards of conduct on those who give investment advice even before these developments. However, it is not clear that they can apply state laws to ERISA plans. Nevada has a law holding brokers to a fiduciary standard, the New Jersey Bureau of Securities is proposing a uniform fiduciary standard for investment professionals, and New York adopted a rule imposing a best interest standard on insurance and annuity sales. (Only New York carved out employee plans). Massachusetts is aggressively pursuing legal action against Scottrade for violating Scottrade’s own policies put in place to comply with the Fiduciary Rule.
We can expect these activities to continue, especially in blue states. They raise the possibility of inconsistent rules applying to the same advice, which could be fiduciary advice in one state and non-fiduciary advice in another. Since ERISA contemplates uniform national fiduciary regulation, we can expect court challenges to these laws in the future. We can also expect a new fiduciary proposal from the Department of Labor, which will presumably be less sweeping than the rule that was invalidated.
What to Do
Retirement security seems to be one of the few issues before Congress that draws bipartisan support. In addition, Senator Hatch, a sponsor of RESA, is expected to push for passage of a pension bill before his upcoming retirement. This makes new legislation a real possibility.
For now, plan sponsors and fiduciaries should closely monitor these developments to be aware of future compliance issues and opportunities. Smaller employers looking to simplify their responsibilities when offering a plan to their employees should pay particular attention to the fate of the “open MEP” legislation. It may become possible for their recordkeeper or financial firm to offer a plan that relieves them of many of the responsibilities required when running a single employer plan. In the meantime, let’s hope that our leaders can come together to pass legislation that will provide America’s workers with greater access to employer-sponsored plans while reducing the risk to plan sponsors and fiduciaries.
Carol I. Buckmann, JD is the co-founding partner of Cohen & Buckmann, P.C. (www.cohenbuckmann.com). She is one of the top-rated employee benefits and ERISA attorneys in the U.S., and deals with some of the foremost issues in ERISA, including pension plan compliance, fiduciary responsibilities and investment fund formation.
The views expressed in this article are those of the author and do not necessarily represent the views of PenChecks Trust, its subsidiaries or affiliates.