January 31, 2014
Harkin Formally Introduces 'USA Retirement' Legislation Including Hybrid Plan Clarifications
Senator Tom Harkin (D-IA), chairman of the Senate Health, Education, Labor and Pensions (HELP) Committee, formally introduced the Universal, Secure, and Adaptable (USA) Retirement Funds Act (S. 1979) on January 30, after nearly a year and a half of development. The HELP committee has prepared a one-page snapshot look at the bill, a two-page summary, a section-by-section summary and a set of Frequently Asked Questions. The bill establishes a new workplace savings plan and makes a number of positive changes recommended by the Council affecting defined contribution and defined benefit plans, including hybrid plans.
In a statement unveiling the bill, Harkin cited a “growing retirement crisis” and a “retirement income deficit” (the difference between what individuals have saved and what they will need for retirement) of $6.6 trillion. His legislation establishes a new workplace savings plan primarily targeted at the 75 million workers that he said do not already have a retirement plan.
The USA Retirement Funds Act also proposes and number of policy changes, including several that have been promoted by the Council:
- Hybrid Plans: S. 1979 formally clarifies the rules for hybrid plans, defining “market rate of return” rule under the Pension Protection Act (PPA) and permitting plans to use certain fixed rates of return, with transition relief until final regulations are effective. S.1979 also includes transitional protection for pension equity plans (PEPs), defined benefit plans that provide a lump-sum benefit (or the annuity equivalent of that lump-sum benefit) at the termination of a participant’s employment and determines the total benefits by providing a schedule of credits that are based on a participant’s final average pay. PEPs that have operated in reasonable good faith compliance with the existing rules shall not be subject to adverse new rules or agency enforcement until the effective date of regulations addressing PEP issues. The Council has long advocated for these clarificationsand has worked closely with Senator Harkin’s office. A Benefits Blueprint summary of the hybrid plan provisionsis available on the Council website.
- Defined Contribution Plans: The bill includes provisions to promote the creation of multiple-employer plans, permits alternative plan fiduciary arrangements for small employers, imposes fiduciary responsibility on advice with regard to certain rollover investments; establishes a safe harbor for employers offering lifetime income options in their plans and mandates annual disclosure of how participants’ savings translates into a lifetime stream of income.
- Defined Benefit Plans: The measure clarifies the definition of “normal retirement age,” sets a moratorium on imposition of plan “shutdown” liability under ERISA Section 4062(e), eliminates the credit balance offset for purposes of applying benefit restrictions and determining a plan’s adjusted funding target attainment percentage, simplifies the method for determining changes for quarterly contributions, allows plan sponsors to discount contributions from a final due date, simplifies certain PPA elections and notices and provides for earlier multiemployer plan reporting to the Department of Labor, Department of Treasury and Pension Benefit Guaranty Corporation (PBGC). The bill also includes a number of administrative changes to PBGC’s insurance program with respect to terminating plans.
As we reported in the January 27 Benefits Byte, the centerpiece of this bill is the creation of a new privately-run retirement plan. Employers with more than ten employees would be required to offer a retirement plan with automatic enrollment and a lifetime income option or automatically enroll employees in a USA Retirement Fund. (Self-employed individuals or employees of very small business would also be able to participate.) The concept was first raised in Harkin’s July 2012 report, The Retirement Crisis and a Plan to Solve It (see pages 6-7).
Other elements of this new plan include:
- Automatic Enrollment: Employees would be enrolled automatically at a static rate of 6 percent per year (with the opportunity to adjust contributions or opt out).
- Contributions: Individuals could contribute up to $10,000 per year, pre-tax, and employers would be able to contribute up to $5,000 per year for each employee. Participants would be allowed to change funds once a year
- Management and Fiduciary Duty: The funds would be privately run but approved and overseen by the U.S. Department of Labor and managed and administered by a diverse board of qualified trustees with fiduciary responsibility. The assets will be pooled and professionally managed by the trustees with the specific direction to protect participants from longevity risk and market volatility. Employers will not share in the fiduciary responsibility or be required to provide additional funding or guarantees for the funds.
- Distributions: Distributions would be annuitized, with survivor benefits and spousal protections. Only individuals over 60 with “sufficient retirement income” outside the fund or facing a financial hardship would be permitted to take a one-time lump sum of $10,000 or 50 percent of their benefit, whichever is larger.
- Disclosure to Participants: Funds would be fully transparent, including investment policy, performance and fee information disclosed in an annual statement to participants.
- Portability: Individuals would be permitted to roll 401(k) or IRA balances into a USA Retirement Fund. A person under 60 with a “small” account balance would be able to roll over the account balance to another retirement plan.
The Council continues to have concerns about the presence of employer mandates in the legislation and the potential effect on plan sponsorship of the USA Retirement Fund. Senator Harkin intends to retire at the end of the year. As he seeks middle ground with Republicans on some or all elements of his bill, some elements could be modified and/or broken out and moved separately on a bipartisan basis.
For more information, contact Lynn Dudley, senior vice president, retirement and international benefits policy, Diann Howland, vice president, legislative affairs, or Jan Jacobson, senior counsel, retirement policy, at (202) 289-6700.