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Legislation That Aims to Help Workers Save

Aron Szapiro
Christine Benz

Christine Benz: Hi, I'm Christine Benz from Morningstar.com. A bill wending its way through Congress would fill some holes in the way we plan for retirement in the U.S. Joining me to discuss what's called the Secure Act is Aron Szapiro. He's director of policy research for Morningstar.

Aron, thank you so much for being here.

Aron Szapiro: Thanks so much for having me.

Benz: Aron, let's talk about this bill. How sweeping are the changes that it would introduce?

Szapiro: So, on the one hand, this really is the most significant change to the defined-contribution system from a policy perspective, if it passes, since the Pension Protection Act of 2006. On the other hand, it's a lot less sweeping than the Pension Protection Act of 2006, but it would introduce a number of significant reforms that could really help ordinary people as they try to save for retirement.

In some ways, the bill is almost like a random grab bag of ideas that have bipartisan and bicameral support, but if I'm looking for a through line that gives me some indication of some of the themes around these provisions, I think you see a pivot and shift from Congress to issues of equity and adequacy in the defined-contribution system and away from some of the issues of sustainability, which were much more top of mind, particularly for defined-benefit plans during the last really major retirement reform bill in 2006.

Benz: So, one thing that you've written about before on Morningstar.com is the idea that in a lot of ways, we have kind of this two-tier retirement system in the U.S., where if you work for a large employer, you, chances are, have access to a very good quality plan, whereas if you work for a small employer, you might not have any plan at all or maybe the plan is subpar. Does the bill address that issue and that inequity in any way?

Szapiro: Yeah, it certainly tries to, and that's one of the focuses on sort of the equity of the defined-contribution system. It has a provision that would make it much easier for small employers to get together and offer multiple employer plans, and specifically it would set up a system where a pooled provider could go and offer these plans, bring in small employers, and hopefully improve the quality of those plans. We've been a little bit skeptical that this would greatly increase the number of small employers offering plans. We think it's much more likely to enhance the quality of those plans since they'd have a much bigger scale. They'd be centrally managed by one of these new pooled providers, and the Joint Committee on Taxation, which is the professional group that scores these things for Congress, agrees. They don't see this leading to a big increase in coverage, but it's still an important step forward, raising the bar for small plans and making them look a little bit more like big plans, have some of the features that we know really help people save for retirement.

Benz: Getting people to save is another one of the challenges in the retirement planning space. This bill allows employers to enroll their employees at a higher rate, is that correct?

Szapiro: Yeah, that's right.

Benz: To automatically enroll them?

Szapiro: Exactly, so it can automatically enroll people up to 15% of their salary and still be in a safe harbor to avoid getting tangled up in some of those nondiscrimination testing requirements, which is an important thing. Now, the old limits were 10%, which is pretty high, and most employers don't do that, but I think that's an acknowledgement, again if you're looking for sort of a through line through this bill, that maybe some of the existing auto-enrollment practices don't lead to enough adequacy of saving, and we should give employers the tools to ensure that their participants are saving at sufficiently high levels to enjoy a secure retirement.

Benz: Another component here is lifetime income. It will be easier for plans to adopt some sort of a lifetime income provision. Let's talk about that.

Szapiro: Yeah, absolutely. So one of the things this bill would do, and I should say, this is an idea that's been kicked around for quite some time. It's something the Government Accountability Office has opined on. There's a pretty wide consensus that it's important to give employers some comfort if they're going to offer an annuity in their plan that they won't be on the hook if that provider has financial problems 10, 15, 20, 30 years down the road, and so this bill would provide a clear safe harbor where if you check the box, you are not liable for that insurance company's solvency as long as you follow the safe harbor. That I think is necessary, maybe not sufficient, but necessary to give employers some comfort that they can offer annuities inside their plans.

It also has provisions to make sure that when employers do offer annuities inside 401(k)s that those annuities will be portable. I think that's also really important, and we've been talking for a long time about the maturation of the DC system and how we're going to get people to convert all that they put together during the accumulation phase into lifetime income, and I think this removes an important barrier to offering those solutions inside plans.

The last thing it does in terms of lifetime income is it directs the Department of Labor to promulgate regulations that would instruct plan sponsors to show participants what their lifetime incomes could be based on their account balances and contributions, and you'd expect that to look a lot more like the lifetime income you can generate from a single premium immediate annuity than from something like the 4% rule, so we think that's what those regulations will ultimately look like, assuming this all passes.

Benz: Right. So you mentioned annuities, and I think some of our viewers' hackles might go up when they hear the word "annuity." We're talking about very vanilla annuities that would be embedded within defined-contribution plans, right? Not high-cost variable-annuity products.

Szapiro: I think probably that's what we're talking about. I mean, the legislation of course just speaks to all annuities, which as you say, encompasses a lot of different kinds of products, but the bill does not relieve the plan sponsor of their fiduciary obligations for picking products that are for the sole benefit of their participants, so our expectation is that this would pave the road for products that could help people lock in some guaranteed income and would hopefully be high-quality products.

Benz: Final question, Aron, an important one: In today's Congress, how likely is this bill to become law and to come to fruition?

Szapiro: Well, a lot of these provisions have been popular for some time. A number of them were in a bill that passed in 2016 by a unanimous 26-to-nothing vote out of Senate Finance, and so there's been bipartisan, bicameral support for every provision in this bill for a long time. So, given that it's now passed out of Ways and Means, we're really optimistic that this will become law some time this year, so the chances have not looked better for some time for these provisions, and hopefully this is the year Congress gets it done.

Benz: OK, Aron. Always great to get your perspective. Thank you so much for being here.

Szapiro: Thank you.

Benz: Thanks for tuning in. I'm Christine Benz for Morningstar.com.