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Congressional priority? Hatch retirement reforms

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The doubters have their doubts, but Sen. Orrin Hatch says he doesn’t introduce legislation just because.

He’s sponsored or co-sponsored more 700 bills that have become law, more than any other sitting senator. 

“When I introduce legislation, I’m serious about enacting that legislation into law,” the Republican from Utah told our sister site, BenefitsPro, on the eve of the recent midterm election. 

And he insisted the Secure Annuities for Employee Retirement Act, first introduced in 2013, will be a top legislative priority in 2015, “regardless of the outcome of the election.” 

We all now know what the outcome was. Republicans emerged with firm majorities in both chambers of Congress, meaning Hatch will likely be made chair of the powerful Senate Finance Committee next year. 

Given his intent on seeing the SAFE Act become law, and the fact that Republican numbers now work in his favor, here’s a deeper look at just what aspects of the country’s retirement system Hatch is hoping to reform, and how. 

Also read: Making sense of the pension gap

It’s safe to say that, if enacted, the SAFE Act would systemically change how public pension plans fund future obligations. It also would expand plan coverage in the private sector by incentivizing small businesses to sponsor savings plans, and simplify large sponsors’ regulatory obligations. 

It would also address retirees’ longevity risk, re-write portions of ERISA, and transfer a good amount of oversight authority from the Department of Labor to the U.S. Treasury Department. 

Whether all or even some of it gets done is, of course, uncertain. But Hatch is known for his bipartisanship. 

“Sen. Hatch has been a major driver of a consensus in both chambers around certain common-sense enhancements to retirement plans,” Derek Dorn, a partner in the Washington, D.C., law firm Davis & Harman, recently told reporters. “His perch atop the Finance Committee certainly creates a significant likelihood that they will move forward.” 

What follows are some of the details behind a few of the bigger provisions of the proposed law: 

Public pension reform

In one proposal with some of the biggest implications, Hatch wants to give local and state governments the option of moving their pension liabilities to the books of private insurance companies. They, in turn, would deliver retirement income in the form of deferred, fixed-income lifetime annuities. This would require annual individual contributions by accountholders. 

In Hatch’s way of thinking, that would remove governments’ temptation to underfund pension obligations, a problem that has plagued public pensions across the country.

If adopted, this component of the SAFE Act would be the latest boon to the life insurance industry. The Treasury and Labor department in October issued guidance that could make longevity annuities a more common sight in the target-date funds in 401(k) plans.

“We should see what they can do to help us solve the lifetime income challenge,” Hatch said of the insurers.

By design, the federal government would have limited involvement in the shift, a pitch sure to garner support in the Republican caucus. 

Hatch said he has faith in state insurance departments’ ability to forecast insurer solvency. “The life insurance industry is reliably solvent because state insurance regulations are strict, with stringent reserve requirements and conservative investment standards. In fact, state-licensed life insurance carriers survived the 2008 stock market meltdown in far better condition than any other part of the financial sector,” he said in an email interview.

Private pension reform

In the private sector, the SAFE Act would create incentives for the majority of small employers not offering some form of workplace plan. It also includes reforms for those larger employers with plans already in place. 

The Starter 401(k) Wage Deferral Only Safe Harbor Plan addresses employers that want to help workers save but are not in a position to implement a plan, or contribute a match. It works like an IRA offered through the workplace, taking advantage of the power of payroll systems to automatically withdraw contributions, and lets participants save up to $8,000 a year, more than what’s allowed with IRAs. 

As is, small employers that adopt a qualified plan get a tax credit, for three years, equal to the lesser of 50 percent of start-up costs or $500. Hatch’s law would bump the potential deduction up to $5,000. 

Employers who experience rapid growth can upgrade from a SIMPLE plan to a Safe Harbor 401(k) immediately, as opposed to waiting to the end of the year. That gives participants the benefit of up to 12 months more of employer matches. 

The SAFE Act also would remove limits on auto-escalation rates, allowing those participants with the ability to do so to save at higher rates as they earn more money.

It also would change the rules regarding multiple employer plans. 

Today, groups of small employers can pool resources in multiple employer plans to share the costs of administrators and providers. But in order to reap the true benefit from a multiple employer plan — shifting fiduciary liability from employers to a central trustee — those employers must have a shared association, like a trade group. 

The SAFE Act would eliminate that requirement, paving the way for more “open” multiple employer plans. 

Reforms for large plans

Big employers don’t need incentives to implement plans — the vast majority already does. But they are begging for regulatory relief.

Subtitled “Pension Plan and Retirement Savings Simplification,” this portion of the SAFE Act would make numerous adjustments to existing law. It would, for example, reduce sponsors’ discrimination testing burdens and give sponsors greater flexibility in amending plans without running afoul of ERISA’s anti-cutback rules, which protect accrued benefits.

In what may prove to be an even more controversial provision, Hatch would make hardship loans from 401(k) plans more accessible by eliminating the requirement that participants take a loan from their plan before claiming an early distribution. That approach conflicts with industry experts who say 401(k) loans should be less accessible, because they eat up retirement savings.

Elsewhere, existing law prevents annuities from being held in IRAs, but the SAFE Act would allow annuities in qualified plans to be held in IRAs when those plans are eventually rolled into an individual account. That would be the only exception to the rule prohibiting annuities in IRAs.

The law also creates an entirely new safe harbor plan that would incrementally raise default contribution rates to 10 percent of income. Sponsors would be incentivized to match the more aggressive savings rates with greater tax incentives and they would not have to endure costly non-discrimination testing. 

The SAFE Act and longevity reform

Hatch is a member of the growing chorus that wants 401(k) investors to have greater access to deferred-income or longevity annuities. He was hoping to have required minimum distributions eliminated from these annuities after a retiree reaches age 70 1/2, but the IRS beat him to the punch with guidance issued last summer. 

Hatch would also allow for greater freedom of lump-sum payments from defined benefit plans, and require Treasury to update mortality tables more frequently.

The SAFE Act on ERISA reform

The law would allow for IRS and ERISA disclosures to be sent electronically and change the rules regarding annual plan audits for plans with more than 100 employees. The threshold for audits would be plans with 100 actual participants, not eligible participants. 

It also would make the selection of an annuity provider easier by not requiring sponsors to project the future solvency of an insurer. That would be left up to regulators at the state level. 

More oversight to Treasury 

The SAFE Act would end the long-running debate over a universal fiduciary standard; no one would be waiting for a decision from the DOL, because the matter would no longer fall under its jurisdiction. 

Instead, it would shift jurisdiction over prohibited transactions to Treasury. In turn, Treasury would coordinate with the SEC to create rules relating to the professional standard of care owed by brokers and RIAs to retirement account investors.

See also:

11 ways the 2014 elections will impact your wallet

Is Congressional gridlock good for retirement?


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