Man Bites Dog! Congress Is Writing Retirement Legislation!

Abnormal Activity In 2006, Congress passed the Pension Protection Act, which, among other provisions, encouraged 401(k) plan sponsors to offer automated-enrollment programs and expanded the use of target-date funds. Since that bill's passage, though, Congress has effectively ignored retirement issues.

At long last, that is changing. Last week, the House of Representatives passed a bipartisan bill out of the Ways and Means Committee. The Senate followed suit, releasing a similar proposal from its Committee on Finance, co-sponsored by Republican Chuck Grassley and Democrat Ron Wyden. With the House and Senate operating in unison and prominent members of both parties in support, passage seems likely.

The bill is incremental, not revolutionary, and its provisions are not particularly cohesive. In the words of Morningstar policy director Aron Szapiro, who wrote about this subject a year ago (when earlier versions of the bill were floated), the proposal is a "random assortment of bipartisan ideas." However, its very existence represents progress. That Congress might reach any agreement on retirement legislation, even if limited and unfocused, comes as a surprise.

The main features for the House bill, which is titled "Setting Every Community Up for Retirement Enhancement Act of 2019” (aka the SECURE Act ... sometimes, the acronym is not worth the effort), are--

1) Embracing Annuities Nobody is happier with the SECURE Act than the Insured Retirement Institute. It released a statement calling Washington's effort "a major step forward toward" addressing the country's "looming retirement crisis."

And why wouldn’t the IRI be delighted? It exists to represent the interests of annuity providers, and those interests are well served by the proposal, thanks much. The SECURE Act explicitly permits 401(k)s plans to offer lifetime annuities; mandates that those annuities be portable; and (perhaps most gratifyingly) primes the sales pump by requiring that 401(k) statements show what the investor’s lump sum would be if translated into monthly income. Trifecta!

Mutual fund companies are less pleased, figuring that any business that insurers gain from 401(k)s will likely be their loss. Nine times out of 10, when the major fund providers, such as Vanguard or Fidelity, take one side of an issue and an insurance trade organization lands on another, I stand with the fund companies. They have earned the trust. This instance, however, is the exception. Annuities have been a missing component of 401(k) plans.

2) Strengthening Automatic Enrollment Today's regulations extend a legal safe harbor for automated-enrollment programs for contribution rates up to 10% of the employee's salary. Sponsors are not prohibited from designing plans that exceed that amount, but in doing so they assume some fiduciary risks. It is possible, albeit perhaps unlikely, that they could face a lawsuit for their decision.

The SECURE Act would end that uncertainty. After the automatically enrolled employee’s first year on the job, the 401(k) plan could push her contribution rate as high as 15%, without legal concerns.

That enhancement might seem more symbolic than actual: Do defaulted 401(k) participants truly contribute at such levels? The answer is yes, they do. For example, at plans where Fidelity serves as the record keeper, the current average deferral rate for automatically enrolled participants is more than 8%. Clearly, those on the higher side of average are already bumping against the 10% mark.

3) Extending IRA Ages The SECURE Act eliminates all age restrictions on IRA contributions. In theory, one could put money into an IRA as a centenarian.

In practice, I confess, I do not yet understand how that process would work, as IRAs will continue to mandate distributions, once the account holder reaches a certain age (which would increase under the proposal from 70½ years to 72). Invest money into one end of the IRA, withdraw it from the other? That does seem rather circular.

Presumably, congressional staffers--who tend to consider such details, even if their superiors have not--have good reasons for their decision. At any rate, the direction of the provision is instructive. The bill acknowledges that, at least for some white-collar workers, retirement ages are creeping upward. Historic rules of thumb no longer suffice.

4) Opening Multiple Employer Plans Defined-contribution plans were an "oops baby" that worked out well. Had Congress intentionally designed a defined-contribution program, I doubt that it would have been significantly better. (Notably, several of the suggestions given by The Wall Street Journal's Jason Zweig, when advocating that the United States "invent a new retirement plan," bear a resemblance to ... 401(k) features.)

However, it must be granted that 401(k)s serve large companies better than they do the smaller fries. Big companies have the resources, and often also the inclination, to research, evaluate, and monitor their plan providers, as required by section 401(k) rules. Most small to midsize firms, on the other hand, couldn’t be bothered. The easier the plan is to implement, the better.

In other words, smaller businesses would be happy to piggyback on others’ efforts. Today, they can do so only under certain circumstances, as the existing multiple employer plan regulations are onerous. (All MEP members must operate in related industries, and if one member behaves poorly, the rest of the group is punished.) With Open MEPs, those barriers would be removed.

Opening MEPs would not guarantee their success; several issues remain. Nonetheless, the recommendation is significant, as an indicator of the political system’s health. Existing MEP restrictions are pointless; were Congress fully functional, they would have been banished long ago. Better late than never.

John Rekenthaler has been researching the fund industry since 1988. He is now a columnist for Morningstar.com and a member of Morningstar's investment research department. John is quick to point out that while Morningstar typically agrees with the views of the Rekenthaler Report, his views are his own.