New bipartisan legislation in the Senate aims to increase the use of annuities in 401(k) plans, and boost retirement-plan adoption by small employers through a particular type of defined-contribution plan known as an open multiple employer plan.
The bill, the Retirement Enhancement and Savings Act of 2018, is nearly identical to legislation that unanimously passed the Senate Finance Committee in late 2016 but which didn't get a full vote on the Senate floor prior to the end of the congressional session. Committee chairman Orrin Hatch (R-Utah) and ranking member Ron Wyden (D-Ore.) are co-sponsors of the measure, introduced Thursday.
"It's like a laundry list of things that would make improvements [to the retirement system]," said Aron Szapiro, director of policy research at Morningstar Inc. "I'm cautiously optimistic about the bill's prospects. It has a lot of bipartisan support, and I don't think they're reintroducing it for no reason."
One of the more significant provisions would create pooled employer plans, a type of open multiple employer plan that would allow small businesses to band together in a common DC plan. The provision would, among other things, eliminate a "nexus" requirement that only allows related businesses (law firms, for example) to join an open MEP, effectively opening plans to a broader group.
One benefit of these PEPs would be lower plan costs for investors, since a greater number of small employers sharing a DC plan would boost their economies of scale. Policymakers hope the combination of higher-quality plans, easier plan administration and less fiduciary liability for small employers will promote at least a modest closure of the gap in retirement-plan coverage between large employers and small employers.
"PEPs have the potential to be a pretty big game changer," Mr. Szapiro said. "The 401(k) system works if you're a big employer. Helping small employers is something policymakers have been trying to do for a long time."
Around 10 states have also tried addressing the coverage gap among small employers by passing legislation creating automatic-enrollment, payroll-deduction IRA programs (auto-IRAs) and retirement-plan marketplaces.
The Senate legislation would also amend annuity rules — specifically those around portability, disclosure and fiduciary responsibility — in an effort to promote their use by 401(k) plan sponsors.
Some employers have been hesitant to include annuities as a 401(k) investment option due to current fiduciary-related rules around the assessment of an insurer's solvency, industry observers say. Issues around portability — for example, what happens to a participant's annuity if a plan is no longer able to hold it as an investment option — have also given employers pause.
The bill would also seek to reframe the 401(k) plan as a pension-like, income-producing (rather than wealth-generating) vehicle through lifetime income statements. Statements would show participants how their current account balance translates into a monthly income stream in retirement.