Legislative update, Fall 2018

Transcription

1 RETIREMENT INSIGHTS Institutional Retirement and Trust Legislative update, Fall 2018 Challenges and opportunities as midterms approach By Chad O. Breunig, J.D. Senior Vice President, Director of Fiduciary and Regulatory Support Services, Wells Fargo Institutional Retirement and Trust (IRT) After a period of relative inaction, a few retirement initiatives are gaining traction ahead of midterm congressional elections. Meanwhile, regulators are looking for missing participants. White House A tax law victory and a new executive order on retirement Investments in Retirement Plans: Congress Amid midterms, multiple employer plans and pension equity plans gain traction. DOL Regulation Increased audits for lost participants and an inconsistent process

2 The White House What has President Trump meant for retirement? President Trump s initial address to Congress in February 2017 called for a reduction in both regulations and taxes. In the antiregulation sphere, he directed all federal agencies to review regulations that were in-flight, directed the Department of Labor (DOL) to re-examine the Conflict of Interest Rule, and famously directed that for every one new regulation, two old regulations must be eliminated. For taxes, he called for a decrease in corporate tax to make American corporations more competitive and for massive tax relief for the middle class. The first of those areas, regulations, is notable for the change it has brought to the retirement industry, and the second, taxes, for the changes that didn t occur. Overall, legislators, regulators, and the administration have been relatively inactive in the retirement sphere, until recently. Anti-regulation Conflict of Interest Rule Trump directed DOL to relook at the rule Overturned by the Fifth Circuit Court of Appeals in June DOL chose not to appeal Rule was eliminated Lower taxes Significant tax relief bill passed It did NOT affect 401(k) deferrals or nonqualified plan benefits Would have been an easy way to generate tax revenue to offset costs of tax breaks Was strongly considered by both parties but ultimately not included Other creative ways were found to pay for tax breaks Retirement Executive Order adds weight to popular measures On August 24, President Trump signed an executive order in Charlotte, North Carolina, aimed at strengthening retirement security. Potential measures include revision of required minimum distribution (RMD) rules, creation of multiple employer plans (MEPs), and simplified administration for small and medium-size business retirement plans. Specifically, the order calls on the DOL and the Department of the Treasury to: Review rules governing RMDs with an eye toward starting them later than age 70½ or reducing the amount of the required distribution. Consider the pros and cons of pooled MEPs, which would allow companies to offer the 401(k) plans of financial institutions with participants pooled from multiple unaffiliated employers. Look at revising administrative requirements for workplace retirement plans in order to lower costs and increase adoption among small and medium-size businesses. Labor Secretary Alex Acosta pointed out that while 401(k) plans have a proven record, one-third of the private workforce does not have access to these plans. ¹ While it s unclear what impact the executive order will have upon Congress, which is already considering bipartisan legislation in these and other areas, many in the industry are using the president s order as a means of encouraging passage of the Retirement Enhancement and Savings Act, known as RESA. Congress What do midterms mean for retirement? Other than a few recent developments, retirement has taken a back seat heading into midterm elections to such issues as the budget, immigration, jobs, and military spending. One developing area has been MEPs, which were highlighted in the president s executive order and are seen as a vehicle to close the retirement savings gap through a cost-effective, more efficient vehicle for small employers. Midterm elections are expected to be hotly contested in the face of a Democratic agenda to flip one or both houses of Congress.

3 CURRENT REPRESENTATION:2 Two independent senators and DEMOCRATS: 47 Senators (47%) 193 Representatives (44%) 2 House vacancies REPUBLICANS: 51 Senators (51%) 235 Representatives (55%) 5 House vacancies THE LIMITS OF POWER: Competing agendas have limited Republican initiatives despite control of both houses and the White House. And the Senate filibuster rule requiring 60 votes for the Senate to act* further curtails the Republican agenda. SPECIAL ELECTIONS: Other indicators aside, those anticipating a Democratic blue wave have seen limited cause for encouragement in special elections to date. In 2017 special elections, one Senate seat switched from a Republican to a Democrat while five Republican and one Democratic seat in the House saw no change in party. As of October 2018, two Senate seats and four House seats were scheduled for special elections,3 with the outcome to be decided on Election Day, November 6. Nonetheless, Republicans have said they have only a chance of maintaining control of the House.4 *There are exceptions. Revenue bills are an example. On September 13, the House Ways and Means Committee passed The Family Savings Act of 2018 out of committee, with House leaders promising a prompt floor vote. The act would exempt those with less than $50,000 from RMDs at age 70½, would lift the age 70½ ban on contributions to traditional IRAs, and would allow penalty-free withdrawals up to $7,500 from retirement accounts for expenditures related to childbirth or adoption. (At present, distributions prior to age 59½ are taxed as ordinary income and may be subject to a 10 percent tax penalty.) It also addresses MEP and other retirement reforms. However, the Senate was not expected to vote on the legislation until after midterm elections. Senate House of Representatives 35 seats to be decided, currently held by: All 435 seats are up for reelection, currently held by: Democrats, 24 Republicans, 9 Independents, 2 Democrats, 193 Republicans, 235 Vacant, 7 Democrats need to keep the 24 and flip 4 seats to overtake the majority Democrats would need to keep all of their current seats and flip 24 seats to overtake the majority 4 Democratic seats are considered toss-ups 2 Republican seats are toss-ups (AZ and NV) 7 Democratic seats lean Democratic 3 Republican seats lean Republican 192 seats are considered solidly Democratic 187 seats are considered solidly Republican Of the remaining races districts lean Democratic 17 districts lean Republican 29 districts are toss-ups A recent two-year budget agreement contained some stealthy retirement impacts, including a broadening and simplification of hardship distribution rules, with the elimination of the six-month prohibition on contributions, and new categories of hardship distributions, including relief distributions due to California wildfires and distributions of: Earnings on elective deferrals Qualified non-elective contributions Qualified matching contributions Profit-sharing contributions The bill also includes improvements to multiemployer plans (related to a firm s collective bargaining agreements with unions versus MEPs in which multiple companies pool resources to provide retirement benefits). Concerns about plan solvency have led to the appointment of a joint committee of Congress to make recommendations and legislative language that may significantly improve solvency of multiemployer plans and the Pension Benefit Guaranty Corporation.

4 Regulation Focus on abandoned plans Preston Rutledge was confirmed as head of the Employee Benefits Security Administration in late 2017, and with new leadership in place, the DOL has been largely focused on abandoned plans. The Fifth Circuit Court of Appeals overturned the Conflict of Interest Rule in June, and the DOL opted not to appeal the ruling. Meanwhile, the U.S. Securities and Exchange Commission has been offering its own guidance in the vacuum following the rule s abandonment. Regulators have increased audit activity, especially with regard to missing or lost participants. They re looking at what plans are doing to keep track of participants, but some have said the approach is uneven depending on the auditor. As a result, the industry has been asking for guidance from the DOL to make the process more uniform. In the face of this, sponsors should document their process for lost participants and work with their service provider to get updated addresses. At Wells Fargo Institutional Retirement and Trust, we re reviewing practices to encourage updating of addresses, looking to expand the unclaimed check process, and working with trade groups to encourage the DOL to issue guidance, including safe harbors. Fraud Moving down market As noted in our last legislative update, fraud is a serious concern for retirement plans. 401(k) accounts are being targeted because fraudsters are realizing 401(k)s have significant balances and are more lucrative than fake credit card purchases. This trend started with the targeting of senior executives because of their assumed higher account balances and the plethora of information available about them online. But more recently, fraudulent activity has expanded down market and has even included attacks on participant loan processes. Fraudsters access 401(k) accounts by building dossiers on individuals. Often they know the name, Social Security number, date of birth, and answers to the out-of-wallet questions, such as the name of a favorite dog or sports team. Much of this information is readily available online. In addition to gathering information, perpetrators often forge participant and sponsor signatures, driver s licenses, and notary stamps and signatures. Fraud prevention is a joint effort between service providers, plan sponsors, and individual participants. Here s an update on what each can do: Service provider At Wells Fargo, we continue to constantly review and modify our authentication protocols. We monitor fraud trends and use the automated clearing house to expose fraudulent accounts, among other tactics. We ve eliminated or changed aspects of our processes, including utilization of agent-issued one-time passcodes, elimination of the use of fax numbers, reliance on U.S. mail and authentication processes around the address of record, and enhanced confirmation processes. Plan sponsor As we ve mentioned previously, plan sponsors should be sure to respond to service provider requests for help with authentication. Consider providing addresses and/or phone numbers of participants for confirmation purposes. And encourage all participants, especially senior executives, to be vigilant. Plan participant Plan participants should pay attention to mail from service providers, which could include confirmations of illegal transactions. They should regularly monitor their account balances and review their social media profile for information they may not want fraudsters to know: planned vacations or personal information that might lead to passwords or out-of-wallet information. They should contact service providers immediately if their account balance drops unexpectedly, if they receive confirmation of an activity they didn t initiate, or if they experience identity theft in other accounts. We recommend they consider fraud protection and visit the Wells Fargo Fraud Information Center for more information on how to help protect themselves from online fraud: privacy-security/fraud/report.

5 Litigation Volatility can lead to stock-drop cases Like fraud, litigation is an ongoing presence in the world of retirement plans and no one is completely immune from it. Even plans as low in assets as $10 million have been sued, including service providers and plan sponsors alike. Fees are still a major focus, but remember that ERISA says reasonable, not cheapest. Selecting the cheapest option is not a guarantee against getting sued, and fiduciary decisions need to consider more than cost. Factors such as value and its component parts should enter into your decisions, and consider whether you need to do more to help participants. As I ve said before, unhappy participants equal potential litigants. Review all the products you offer in your plan. Remember, when markets are up, people are happy. When they go down, many get unhappy and litigious. And when markets go up and down in the same day, you can bet emotions will be volatile as well. Don t forget about your employer stock. Markets have been up significantly, leading many to be more inclined to invest in employer stock. But a downturn could lead to stock-drop cases. Keep an eye on your participants and keep educating them about diversification. And, as always, document your fiduciary decisions! How can we help? For more information, please contact your Wells Fargo Institutional Retirement and Trust representative or call Plansponsor.com, President Trump Orders Review of Open MEPs, RMD Rules, August 31, U.S. House of Representatives Press Gallery and U.S. Senate Periodical Press Gallery, October 17, Ballotpedia, Special elections to the 115th United States Congress ( ), October 17, Usnews.com, RNC Chairwoman: Chance GOP Can Keep Control of House, September 6, 2018 The opinions expressed here reflect the judgment of the author as of the date of the report and are subject to change without notice. Statistical information has been obtained from sources believed to be reliable, but its accuracy and completeness are not guaranteed. Recordkeeping, trustee, and/or custody services are provided by Wells Fargo Institutional Retirement and Trust, a business unit of Wells Fargo Bank, N.A., a bank affiliate of Wells Fargo & Company. This information is for educational purposes only and does not constitute investment, financial, tax, or legal advice. Please contact your investment, financial, tax, or legal advisor regarding your specific needs and situation. This information and any information provided by employees and representatives of Wells Fargo Bank, N.A., and its affiliates is intended to constitute investment education under U.S. Department of Labor guidance and does not constitute investment advice under the Employee Retirement Income Security Act of Please contact an investment, financial, tax, or legal advisor regarding your specific situation. The information shown is not intended to provide any suggestion that you engage in or refrain from taking a particular course of action. CAR Wells Fargo Bank, N.A. All rights reserved. Restricted. IHA