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Beyond DOL Fiduciary Rule: 4 Key Retirement Policy Areas to Watch

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With the House of Representatives reviewing a second attempt by the Trump administration to push health care reform, points made during a Morningstar Investment Conference session discussing developments on policies beyond the fiduciary rule highlight key areas to watch, whether it passes or not.

Aron Szapiro, director of policy research at Morningstar, began the session by discussing four policy buckets that could affect investment managers and their clients:

  1. Expanded retirement coverage,

  2. Defined contribution plans to be more like defined benefit plans,

  3. Increased transparency of fees and revenue sharing, and

  4. Changed government incentives, such as taxes.

Currently, several states are hoping to launch retirement savings plans to automatically enroll people in state-run IRAs. Illinois and Connecticut are two of these states.

“It’s been sold as 401(k)s for everyone, but it’s not,” Szapiro said. Instead, if an employer didn’t have a retirement plan, it could automatically enroll employees without any coverage in a state-run IRA. He said the Department of Labor put forth regulation proposals last summer that the employer would not have liability under the Employee Retirement Income Security Act, which he said would be “most likely voted down in the Senate before May 10.”

Despite that, states already in the process may still go ahead and “see what happens in court.”  But, he adds, “It definitely will chill other state efforts if they don’t have clarity of regulation.” He said one obvious problem of these state plans is some people automatically enrolled might be above the income limit of Roth IRAs.

Another congressional idea is to make it easier to form multiple-employer plans, that is, several businesses would ban together under a retirement plan, which gives them more leverage to deal for participants. Still, he doesn’t see this plan inspiring small businesses, which already have a difficult time offering plans, adopting this idea.

The second bucket, making defined contribution plans look more like defined benefit plans, is also in limbo. The House of Representatives tried to pass a bill last December but failed. The bill would have a) made it easier for sponsors to offer annuities, b) provided lifetime forecasts, giving more authority to the Labor Department, and c) redefined the policy problem with small plans. For example, Szapiro says, it’s been difficult for small plans to comply with ERISA, despite congressional efforts to help, so this was a way to professionalize plans.

To increase transparency to fees and revenue sharing, the DOL put forth a “radical transparency” proposal, which Szapiro said would be controversial but may take affect during the next four years.

Finally, major changes in tax incentives could happen to force people to save for retirement. He said that defined contribution plans would definitely be on the chopping block if there was “real tax reform,” which he defined as lowering taxes and expanding the base. He said his guess going forward “will be that anything over $8,000 in contributions will be Roth designated. That may create some winners and losers,” adding that it’s not neutral for they’re exchanging a tax benefit on a marginal rate for a tax benefit on an effective rate. “It’s an experiment on [savings] behavior without a good road map,” he said.

Key to any GOP health care plan are health savings accounts, which have “proliferated in the last decade,” said Jake Spiegel, senior research analyst at Morningstar.  He said that in 2006, HSAs were included in about 4% of employer-sponsored health plans. In 2015 it had grown to 29%, with large employers mainly interested in these plans.

Spiegel said that there are proposals to expand HSA plans “not only to people, but expand contribution limits, too.” The GOP has pushed to double the maximum contribution as well as give a one-time $1000 tax credit to open an HSA, expand them to people under Medicare, and include them with veteran benefits, he said.

Spiegel acknowledged HSAs have challenges. In particular, Morningstar found that “by and large people aren’t using HSAs as effectively as they could be,” he said. “Only 5% contributed the maximum [contribution], and only 4% were investing in HSA loans.”

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