Retirement coverage gap, 401(k) rollovers are big emerging threats for plan advisers

Proliferation of state retirement programs approaching the 'tipping point' where it will lead the federal government to step in

Apr 16, 2018 @ 9:56 am

By Greg Iacurci

The retirement-plan coverage gap and rollovers from 401(k) plans to individual retirement accounts have emerged as two of the largest potential threats for retirement plan advisers, the head of the National Association of Plan Advisors said Sunday.

The public outcry around 401(k) savings generated during the tax-reform debate last year showed Congress that retirement is an important issue to Americans, said Brian Graff, NAPA's executive director. Meanwhile, more than 40% of Americans don't have access to a workplace retirement plan — a statistic that has largely remained flat over the past four decades. That's becoming politically unsustainable, he said.

"This is the next big issue – the coverage gap," said Mr. Graff, who spoke Sunday afternoon at the annual NAPA Summit in Nashville.

"The math is adding up to the government doing something about it, and it's already starting," he added. "Every state almost is looking at a state-run retirement program. I mean, this is prolific."

Around 10 states have passed legislation to create state retirement programs. Five states, for example, have created automatic-enrollment, payroll-deduction IRA programs, which mandate that businesses of a certain size offer a retirement plan to employees; Oregon's is already online. Others have taken other approaches like establishing marketplaces where small businesses can shop for a plan.

However, there's a "tipping point, and I think we're getting close," Mr. Graff said, to the number of states that proceed with such programs before the federal government steps in to create a national framework, rather than having dozens of different state programs.

Indeed, some federal proposals have already been floated. Rep. Richie Neal (D-Mass.), the ranking member of the Ways and Means Committee — who would likely become chairman if the House flips Democratic in November elections — introduced "massive, paradigm-shifting retirement legislation" two months ago, Mr. Graff said. That bill, the Automatic Retirement Plan Act, would mandate retirement-plan coverage at many small businesses.

One of the concerns of such federal programs, Mr. Graff said during a press conference, is that a nationwide retirement program wouldn't be run by the private market, but instead by the federal government, which could try acting as an investment manager, for example.

Of course, retirement plan advisers could also benefit. If there were a mandate attached to federal legislation, there would instantly be a larger supply pool of 401(k) plans to work with.

At the same time as the coverage debate is occurring, a recent court ruling against the Department of Labor fiduciary rule could spell trouble for fiduciary advisers to 401(k) plans who also solicit rollover business from plan participants, Mr. Graff said.

One good thing about the fiduciary rule, which raises investment-advice standards in retirement accounts, is that it clarifies how fiduciary plan advisers can do rollover business without crossing over a red line, he said. Prior to the rule, there was a question as to whether such business constituted a prohibited transaction or self-dealing, since advisers often receive higher fees from participants in IRAs than 401(k)s.

However, the 5th Circuit Court of Appeals recently vacated the fiduciary rule. If the DOL doesn't appeal the decision — a likely possibility, given the Trump administration's deregulatory bent — then it will be taken off the books, creating more uncertainty about rollovers.

"Previously, that was unclear whether you could do that," Mr. Graff said, referencing rollovers from fiduciary plan advisers. "And we could be moving to a situation where it could be unclear, which from a policy perspective is [alarming]."

"It's a real problem and not getting any attention at all," he added.

(More: State auto-IRA programs poised to catch advisers' attention)

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