House Workforce Subcommittee Issues Testimony From American Benefits Council
"Chairman Walberg, Ranking Member Sablan, and Members of the Subcommittee, thank you for the opportunity to speak with you today on the ways that we can work together to simplify and modernize retirement plan administration. The Subcommittee has before it a number of forwarding-thinking proposals that the American Benefits Committee is pleased to support.
"My name is
"The Council and I appreciate the opportunity to participate in today's critical and timely hearing on retirement. The Council is a public policy organization representing principally Fortune 500 companies and other organizations that assist employers of all sizes in providing benefits to employees. Collectively, the Council's members either sponsor directly or provide services to retirement and health plans covering more than 100 million Americans.
"The views expressed in this testimony are those of the Council, although my testimony is informed by my extensive experience at Fidelity, the nation's largest provider of services to defined contribution (DC) plans. Fidelity provides recordkeeping, investment management, brokerage and custodial/trustee services to thousands of Code section 401(k), 403(b) and other retirement plans covering over 18 million individuals Fidelity also sponsors a plan for over 40,000 employees and shares many of the same concerns other plan sponsors have regarding the need to modernize plan administration.
"My testimony today will focus on H.R. 4158, the Retirement Plan Modernization Act, which would increase the cash-out limit to reflect normal cost of living increases. The Council strongly supports this bipartisan, common-sense improvement. But I will also discuss our support for H.R. 4610, the RETIRE Act, which modernizes the rules regarding delivery of documents electronically, and H.R. 854, the Retirement Security for American Workers Act, which makes vital improvements to the rules governing multiple employer plans. The provisions of H.R. 854 are also contained in the Retirement Enhancement and Savings Act, or RESA, (H.R. 5282), which contains a variety of bipartisan improvements that the Council also supports.
INTRODUCTION
"Employer-sponsored DC plans and defined benefit (DB) retirement plans are an indispensable building block of our Nation's retirement system. Retirement plans, like those sponsored and administered by the Council's members, including by Fidelity, successfully assist tens of millions of families in accumulating retirement savings and will provide trillions of dollars in retirement income and a more financially secure retirement.
"With about 100 million active and retired workers (and their spouses) accumulating retirement savings under employment-based retirement plans and IRAs, it is critical that all key stakeholders - government, employers, individual investors, and service providers - continually look at ways to make the system better. The proposals that I will discuss today are improvements that can be made to simplify and modernize our system.
"The need to build on, but not harm, our successful private system for delivery of retirement security alongside
"A 2020 Vision recommended adopting a number of improvements embodied in the legislation that is the subject of this hearing. The following recommendations come straight from A 2020 Vision:
* Update rules to modernize communications with employees. Permit the use of common-sense approaches to deliver information among stakeholders while leveraging continually evolving technology and appropriately protecting privacy. To protect employees and employers, clear guidance must be developed that sets forth the circumstances and methodology by which personal information about benefit plan participants may be shared electronically in a confidential manner that protects privacy.
* Make common-sense changes to help small businesses through enhancing Open-MEPs Change the multiple employer plan rules to facilitate groupings of unrelated employers and limit collective liability for retirement plans. Helping small businesses join multiple employer plans (MEPs) so they can share administrative costs will expand employer-sponsored retirement coverage. Two changes would help make this possible: first, waiving the requirement for a "nexus" among unrelated businesses in order to join a MEP. Second, eliminating the rule that one employer's failure to meet the criteria necessary to maintain a tax-preferred retirement plan can result in potential disqualification of the plan and loss of tax benefits for the participants.
* Increase the
"Thus, it is with great excitement that I am here on behalf of the Council to support bipartisan legislation that achieves these goals.
MODERNIZING THE CASH-OUT RULES TO REDUCE COSTS TO EMPLOYEES (H.R. 4158)
"To understand the improvements made by Retirement Plan Modernization Act (H.R. 4158), we first need to provide some background. ERISA contains a rule - and a parallel rule appears in the Internal Revenue Code (Code) - that ensures that employees can wait until retirement age to receive benefits under a retirement plan. Specifically, section 203(e) of ERISA and section 411(a)(11) of the Code provide that a plan generally cannot distribute benefits without the consent of a participant. This rule protects participants from having their vested benefits distributed before they are ready to receive it in the form of retirement income. There are two important exceptions to this rule. First, a retirement plan can distribute a participant's benefit once the participant reaches the plan's normal retirement age (or age 62, if later). Second, if a participant terminates employment before retirement age, the plan can distribute the participant's benefit if the present value of the total accrued benefits is equal to or less than the "cash-out limit," which is currently
"Take a simple example. Assume I work for an employer for just a couple years, and accumulate a benefit under my employer's defined benefit plan. I then leave to join another company. Because I worked for a short time only, assume the present value of the annuity I earned, expressed in today's dollars, is less than
"This can also occur in a 401(k) plan. Assume I work for a few years for an employer that automatically enrolled me in its 401(k) plan. Assume when I terminate employment to join another firm, I have accumulated only $2000 in the 401(k) plan. In that case, the plan can distribute that benefit to me immediately.
"Why has this rule existed since the passage of ERISA? The cash-out rule reflects, like many parts of the law, an important balance. On one hand, we want employers to offer employees the right to delay distribution of benefits until retirement. But holding those benefits and accounts - in some cases for many decades - is costly. And these costs are often borne by the employees left behind, particularly in a 401(k) plan.
"Records must be kept for any individual who still has a benefit or account under the plan. The plan must be able to track the contact information for many years for individuals who have terminated employment and otherwise may have no reason to stay in touch with their former employer. By distributing small benefits at termination of employment, the plan is able to reduce costs and ensure that the individual never loses track of their benefit.
"It is critical to remember that the cash-out rules do not prevent individuals from preserving assets for retirement and avoiding taxable income. The law includes important protections to prevent these amounts from being used for something other than retirement income:
* A plan must offer the participant the right to have benefits of more than
* A plan must provide a notice - called a special tax notice - that describes this right to a direct rollover.
* If a participant does not affirmatively select another option (or simply does not respond), any distribution between
"The Retirement Plan Modernization Act, introduced by Chairman Walberg and Ranking Member Sablan (and cosponsored by
"Notably, your bill would not mandate that an employer increase its cash-out threshold, or even have a cash-out rule at all. In fact, many employers do not have a cash-out rule, although we believe most do. Thus your bill preserves employer choice as to what plan features best serve the needs of their employees. In addition, your bill does not prevent a distribution (when allowed by the plan) if an employee chooses to do so. In fact, in many 401(k) plans, departing employees will often rollover their account of any size to an IRA or another employer's plan. And your bill preserves the important protections for employees described above, including the right to a direct tax-free rollover to an IRA.
"
* In 1974, ERISA sections 203(e)(1) and 204(d)(1) set the automatic cash-out ceiling at
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* The Retirement Equity Act of 1984, Section 205(a) raised the automatic cash-out ceiling from
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* The Taxpayer Relief Act of 1997, Section 1071(a)(1) raised the automatic cash-out ceiling from
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"As stated above, the Retirement Plan Modernization Act would also provide that, going forward, the cash-out limit would be increased at the same time and in the same manner as under section 415(d) of the Code (which sets limits on contribution and benefits) in multiples of
"For these reasons, we commend your leadership in introducing this common sense legislation and are pleased to lend our strong support.
LEVERAGING TECHNOLOGY TO IMPROVE PARTICIPANT UNDERSTANDING (H.R. 4610)
"
"The Receiving Electronic Statements To Improve Retiree Earnings Act, or RETIRE Act, (H.R. 4610), which currently has 39 cosponsors of both parties, would amend both ERISA and the Code to provide that a document that is required by either statute to be furnished to a plan participant may be furnished in electronic form if certain requirements are met. The RETIRE Act would allow, but not require, an employer to use e-delivery as the default method to communicate with all participants in its retirement plan.
* Effective access: The system must be designed to result in effective access to the document through electronic means. The bill provides three methods that are considered to meet the effective access prong:
* Direct delivery of the material to an electronic address;
* The posting of material to a website to which access has been granted, "but only if proper notice of the posting has been provided (which may include notice furnished by other electronic means if the content of the notice conveys the need to take action to access the posted material)"; or
* Any other electronic means reasonably calculated to ensure actual receipt.
* Consumer protections for participants: The participant must be able to: (1) select among the specific electronic means made available through which such a document is furnished; (2) modify that selection at any time; and (3) elect to receive paper documents at no additional direct cost to the individual. The system must protect the confidentiality of the participant's personal information.
* Establishes right to paper documents: Importantly, the participant must always have the right to opt out of electronic disclosure at any time and begin receiving notices and documents in paper.
* Annual paper reminder: Every participant must receive an individual annual paper notice describing: (1) the selection of the specific electronic means for receiving documents made by the participant that is in effect at the time that the notice is provided; (2) the right to modify the selection at any time or to elect at any time to receive paper versions of the documents at no direct cost, and how to make such an election; and (3) if applicable, any election made by the participant to receive paper.
* Electronic similar to paper: Any electronically furnished document must be prepared and furnished in a manner that is consistent with the style, format, and content requirements applicable to the particular document, and it must include a notice that apprises the individual of the significance of the document when it is not otherwise reasonably evident as transmitted.
* Preservation of current law and future options: The text provides that nothing in the bill shall be construed to prohibit any e-delivery permitted under current law, including regulations and other guidance, and it would clarify that DOL and the
"As with the Retirement Plan Modernization Act, the RETIRE Act preserves employer choice. Some employers may find that paper disclosure best serve their participants, even as a default method of disclosure. Further, the bill preserves the ability of employees to completely elect out of paper disclosures when they choose to do so, or to elect into paper disclosure at no additional direct charge. We support passage of the RETIRE Act and encourage
INCREASING RETIREMENT COVERAGE THROUGH OPEN MEPS (H.R. 854)
"Finally, I would like to address the Retirement Security for American Workers Act (H.R. 854). This bill would greatly expand opportunities for small employers to band together in a common "multiple employer plan" (MEP) and thereby achieve many of the economies of scale available to large employers. Additionally, it would help quell the growing coverage gap arising from the shifting workforce in a "gig" economy.
"Many Americans lack access to a private retirement plan that can help deliver retirement security. This lack of coverage is most acute within the small business community because small businesses can only spread the fixed costs of retirement plans among a small number of employees. Thus, the per-employee cost of retirement plans is much higher for smaller employers. Expanding coverage among small businesses is important to all plan sponsors, even large employers currently sponsoring retirement plans, because it strengthens the overall voluntary system and helps ensure consistency of coverage through employees' working lives.
"MEPs can address this problem very directly and very effectively. If a small employer joins a MEP with many other small employers, the fixed costs of the plan are spread among the employees of all the participating employers, thus dramatically reducing the per-employee costs.
"Today, MEPs are hindered by two problems: (1) a prohibition on unrelated employers joining together in a MEP, and (2) a penalty system that exposes all employers in a MEP to liability based on the failure of one employer to comply with the rules. H.R. 854 would solve both of these problems and in doing so, would make MEPs available to far more small businesses. We believe that the bill would enable countless small employers across the country that currently do not have a plan to join MEPs and provide retirement benefits to millions of employees who deserve access to retirement security.
"We also view H.R. 854 as a critical component of addressing the problem of so-called "gig" workers. The gig economy has been growing rapidly. According to a study by the
"This dramatic increase in the gig economy contrasts very starkly with the very low rate of coverage of gig workers under retirement plans. The
"As the gig economy has grown, and gig workers continue to be largely uncovered by retirement plans, the time has come for all of us to act. Today, businesses cannot cover gig workers under their retirement plans because gig workers are not employees, and the problem will get worse as estimates show that the gig economy will grow to 55 million workers by 2020. Open MEPs can be a critical part of the solution. Open MEP legislation would permit a business using gig worker to set up an open MEP for gig workers; the gig worker's sole proprietorship could very simply elect to join the open MEP. Accordingly, we support the passage of open MEP legislation.
"On behalf of the
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Footnote:
1 The inflation adjusted figures above are based on the CPI Inflation Calculator made available through the
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