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The US Department of Labor on Monday published a proposal for a new regulation governing multi-employer 401(k) plans. The proposed new rule would make it easier for small businesses to offer retirement plans to their employees by broadening the criteria under which organizations can form multi-employer plans, Employee Benefit News explains:
The arrangements are currently allowed for employers with an affiliation or connection, such as companies with a common owner or members of the same industry trade association. Under the proposed rule, MEPs could be formed by associations of employers in a city, county, state or a multistate metropolitan area, or in a particular industry nationwide, according to the DOL.
Sole proprietors, as well as their families, would be also permitted to join such plans, the DOL said. Professional employer organizations, which are human resources companies that contractually assume certain employment responsibilities for its client employers, could also sponsor plans.
The proposal comes in response to an executive order President Donald Trump signed at the end of the summer, directing his administration to remove barriers to small businesses offering retirement benefits through the multi-employer plans. Employees of smaller organizations are less likely than those at large firms to be offered employer-sponsored retirement plans.
Over the past few years, a growing number of US states and cities have enacted legislation to create state-sponsored retirement savings programs for employees of organizations that don’t offer an employer-sponsored plan like a 401(k). Currently, 40 states have considered, studied, or moved toward implementing this type of program, though only 10 states and one major city (Seattle) have yet implemented them, writes Paula Aven Gladych at Employee Benefit News. Not all state and local policies are alike, however: While automatic-enrollment, payroll-deducting IRA programs (“auto-IRAs”) are the most popular policy tool, others include multiple-employer plans and retirement savings marketplaces:
California, Connecticut, Illinois, Maryland, Oregon and the city of Seattle have adopted automatic IRAs. Massachusetts and Vermont have adopted multiple employer plans and New Jersey and Washington State have adopted marketplaces. New York, the latest state to jump into the fray, has adopted a voluntary payroll deduction IRA. …
The states that haven’t made a move yet will be watching closely to see how effective the different tools are in marketing the plans to employers and employees. … These programs are getting bipartisan support. Blue and red states are studying the issue. Every year there’s a handful of states in study mode, considering what their options are, says [Angela Antonelli, executive director for the Center for Retirement Initiatives at Georgetown University].
New York’s new program, adopted in April as part of the state’s budget for fiscal year 2019, is similar to the auto-IRAs adopted in other states, except that it is not compulsory for any employer to participate, as Paychex analyst Jessica Curtin explained at the time. The program, scheduled to begin in April 2020, uses a Roth IRA structure, so contributions are made on a post-tax basis. Employers cannot make direct contributions to the plan, but those that choose to participate must automatically enroll their employees at a contribution rate of 3 percent of their paychecks; employees may then choose to opt out.
The Fifth Circuit Court of Appeals issued a ruling on Thursday vacating the controversial “fiduciary rule” enacted by the Labor Department during the Obama administration, which would have required financial advisors to act in their clients’ best interests when advising them about retirement. The ruling overturned a February 2017 district court decision upholding the regulation, with a three-judge panel ruling 2–1 that its implementation had violated the Administrative Procedure Act. Politico’s Morning Shift newsletter called Thursday’s decision “a victory for the financial services industry,” whereas labor activists were dismayed:
A range of business associations — including the U.S. Chamber of Commerce, a plaintiff in the case — said in a joint statement that the court “ruled on the side of America’s retirement savers.” The groups have thrown their weight behind an effort by the Securities and Exchange Commission to draft a separate standard for advisers, which they say should “not limit choice for investors.” On the other hand, Christine Owens, executive director of the National Employment Law Project, said the ruling “threatens the Labor Department’s very ability to protect retirement investors now and in the future” — and encouraged an appeal.
Thursday’s decision was handed down just two days after another federal court, the Tenth Circuit, issued a ruling in a separate case concerning the treatment of fixed indexed annuities under the rule. That court found that the Labor Department had satisfied its obligations under the Administrative Procedure Act in amending the rule to make sales of such annuities ineligible for Prohibited Transaction Exemption 84-24 (Proskauer attorneys outline the particulars of the ruling in more detail at JD Supra).
In agreeing with the department’s decision to amend one facet of the fiduciary rule, the Tenth Circuit’s ruling could be interpreted to implicitly uphold the regulation as a whole, although that was not at issue in the case. Yet another fiduciary rule case is still pending in federal court as well, so industry experts are advising retirement plan sponsors to remain compliant with the rule for the time being, Paula Aven Gladych notes at Employee Benefit News:
2017 was a good year for the stock market in the US, with the S&P 500 index rising 22 percent and the Dow Jones industrial average up 25 percent. This bull market has led to a spike in the value of Americans’ retirement savings accounts, which sounds like good news for the retirement readiness of the US workforce. However, Todd C. Frankel and Thomas Heath point out at the Washington Post, these huge gains are inspiring many working Americans to dip into their 401(k)s and IRAs at a hefty penalty to fund big-ticket purchases:
“I’ve seen more money requests for extraneous items in the last six weeks than I have in the last five years,” said Jamie Cox of Richmond-based Harris Financial Group, which manages $500 million in savings for about 800 middle-class families. … Cox said he is seeing more people take larger withdrawals, $20,000 to $40,000, to fund dream vacations or home improvement. …
The average annual return for 401(k)s hit 15.7 percent by the third quarter of 2017, according to Fidelity. And for most Americans, it’s these retirement accounts — 401(k), 403(b), SEP and IRA — that provide the closest evidence of a revving stock market. Retirement assets — including annuity reserves, pensions, and defined contribution plans such as 401(k)s and IRAs — exploded in the United States from $11.6 trillion in 2000 to $27.2 trillion as of Sept. 30, 2017, according to the Investment Company Institute, which represents the mutual fund industry.
In some cases, the early withdrawals financial planners are seeing reflect an irrational belief that the good times will roll on long enough for their retirement accounts to make back the money they are taking out. For others, however—especially workers approaching retirement age—the impulse to cash out comes from a fear that the stock market is overvalued and a crash is on the horizon that will wipe out their savings if they don’t get out in time.
Bank of America Merrill Lynch’s 2017 Plan Wellness Scorecard, an annual report on trends in financial wellness and retirement planning based on the behavior of plan participants and sponsors in the financial firm’s 401(k) business, shows that US employees’ engagement with their employer-sponsored retirement plans increased last year. Among the report’s key findings is a significant growth in the use of Roth 401(k)s, Patty Kujawa observes at Workforce, with nearly a third of employees who have access to a Roth 401(k) increasing their contributions last year—half of them millennials:
Sylvie Feist, BofA Merrill Lynch’s director of financial wellness strategy, said employers are adopting a broader perspective helping their workers gain confidence in making money decisions. They are simplifying plans by using express enrollment, automatic features and by offering more ways to save. According to the survey, 57 percent of employers who offer a traditional 401(k) also offer the Roth option. In addition, the Roth option recently became a one-click and done selection in BofA Merrill Lynch’s Advice Access online advisory service tool.
The Plan Wellness Scorecard also found that more employers are offering health savings accounts and more employees are using them: The number of employees using HSAs increased 21 percent, and HSA balances grew by an average of 36 percent.
The US Treasury has announced that it is winding down the “myRA” program started by former President Barack Obama’s administration in 2015 as a retirement savings option for low-income Americans, and that participants will be allowed to roll their money into private Roth IRAs, the New York Times reports:
Jovita Carranza, the United States treasurer, said in a statement that demand for the accounts was not high enough to justify the expense. The program has cost $70 million since 2014, according to the Treasury, and would cost $10 million a year in the future. … The closing of myRA is the latest step taken by the Trump administration to reverse Obama-era savings initiatives and investor protections.
The myRA program was launched by the Obama administration in 2015 to encourage US citizens to save more for retirement. Marketed as a “starter” retirement account for low-income individuals without employer-sponsored retirement plans, myRAs invested in the government securities investment fund and promised no risk of losing money. However, critics of the myRA questioned whether it was really all that useful as a retirement savings vehicle, noting that the fund’s low level of risk meant it also offered very low returns.
According to the Times, although 30,000 Americans opened myRAs, only 20,000 ever contributed to them, with a median account balance of $500 and total contributions amounting to $34 million. Mark Iwry, the chief architect of the program, told the Times the decision to close the program, which took six years to design, after less than two years was shortsighted and “reflect[ed] a fundamental misunderstanding of its purposes and potential as a long-term investment in working families’ economic security and financial independence.”
Although US employers’ contributions to their employees’ 401(k) plans appear to be growing, Americans’ overall retirement benefits have fallen sharply in the past decade and a half as more organizations shifted from defined-benefit pensions to defined-contribution plans like the 401(k), Bloomberg’s Ben Steverman reported last week, citing a new report from Willis Towers Watson:
Retirement benefits — including employer contributions to pensions, 401(k)s and retiree health-care benefits — fell from 9.1% of worker pay in 2001 to 6.8% in 2015. Spending on traditional pensions plunged 76%, to less than 1% of worker pay. Medical benefits for retired workers became increasingly scant, falling from 1.2% of worker pay to just 0.2%.
The good news is that many companies, while shutting down or freezing pension plans, have sweetened their 401(k) matching contributions. … But higher 401(k) matches aren’t making up for the loss of other retirement benefits overall, and even the most generous 401(k) plans usually lack a traditional pension’s biggest selling point: a guaranteed income for life. With a 401(k), it’s up to individual workers to figure out how much they should be saving — and how to make the money last, once they’ve retired.
This doesn’t necessarily mean employers are spending less on employee benefits, but rather that more of their money is going toward health insurance instead: Willis Towers Watson found that average spending on health care as a percentage of employees’ pay increased from 5.7 percent to 11.5 percent between 2001 and 2015. “Unfortunately,” Steverman adds, “the rising cost of health care is hitting Americans twice” as the cost of insurance is leaving them and their employers with less money to invest in retirement planning, and as they face even higher medical bills in retirement if current cost trends continue.