The 401k needs a facelift, according to an industry group that advocates exclusively for large employer plan sponsors.
The ERISA Industry Committee (ERIC) briefed Congressional staff at a special event on Capitol Hill last week to detail how they would like lawmakers to help large employers strengthen the defined contribution plans they offer their employees.
The event was led by ERIC’s President and CEO, Annette Guarisco Fildes and Aliya Robinson, Senior Vice President of Retirement and Compensation Policy, and featured executives from ManTech International Corporation and Fidelity Investments.
The panel discussed a series of proposals ERIC is promoting to modernize defined contribution and 401k plans, created in response to feedback from ERIC member companies—the nation’s largest employers across all industries—on the changes confronting employers and workers.
“Defined contribution plans provide significant retirement benefits but can be much more effective retirement plans if Congress modernized some of the underlying rules that were adopted in the 1980s,” said Annette Guarisco Fildes, President and CEO, ERIC. “We asked our member companies that are on the front lines of redefining employee benefits, what updates needed to be made so that the plans would work for their employees in today’s world.”
Summary of proposals
Per ERIC’s “Modernizing the DC/401k Plan System” document, here is a brief summary of the proposals, divided into four subject areas. Check out the document for complete details on the proposals.
Part A: Reflect Changes in Workforce Demographics and Plan Designs
- Modify Highly Compensated Employee (HCE) Definition. Provide additional flexibility in the HCE definition so that it can better adapt to the increasing diversity of employers’ workforces without undercutting important coverage and nondiscrimination policies.
- Expand Safe Harbor Auto-Enrollment/Auto-Escalation Designs. Expand the 401k rules to allow for additional designs that will increase savings opportunities and flexibility—as well as contributions and retirement outcomes.
- Allow Plans to Cover Less-Than-Half-Time Employees Without Testing Burdens. Encourage employers to make their defined contribution plans available to employees who work fewer than 1,000 hours a year by allowing for their participation without increasing the burden of nondiscrimination testing.
Part B: Promote Retirement Savings Through Comprehensive Financial Well-Being
- Coordinate Short-Term Financial Well-Being and Retirement Savings. Allow defined contribution plans to permit participants to withdraw or use limited, pre-tax elective deferrals for critical short-term financial needs (such as emergency savings funds) without imposing an early distribution tax penalty.
- Allow Employer Contributions that Match Student Loan Payments. Allow employers to make matching contributions to a 401k plan based on participants’ student loan repayments and, for testing purposes, treat those matching contributions the same way as standard matching contributions.
- Provide Greater Flexibility in the Elective Deferral Limits for Older Employees and Those on Unpaid Leave. Increase the limits on the elective deferrals that older employees are permitted to make to defined contribution plans. Also, allow persons taking unpaid leave to make-up missed contributions and be able to receive the missed matching contributions.
- Expand Access to Key Benefits in Cafeteria Plans. Expand the definition of “qualified benefits” in cafeteria plans to include student loan repayments and emergency savings.
- Expand Portability Among Employer-Provided Plans. Direct the Department of Labor (DOL) and the Department of the Treasury (Treasury) to issue regulations allowing participants to rollover amounts (including assets, investments, annuities) among any tax-favored individual account plan maintained by employers (e.g., defined contribution and 401k plans, 403b plans).
- Allow Employees Additional Opportunities to Repay Unpaid Plan Loans after PreRetirement Separations from Service. Extend repayment of unpaid plan loans to the end of the year in which a participant terminates or, if later, the end of the first calendar quarter after the quarter in which the participant terminates.
Part C: Improve Plan Management and Administration
- Promote Electronic Delivery of Plan Communications. Implement a comprehensive electronic delivery regime under ERISA to allow employers to provide electronic delivery as the default method of issuing notices and disclosures.
- Simplify Notices and Disclosures. Direct the DOL, Treasury, the Internal Revenue Service (IRS), and the Pension Benefit Guaranty Corporation (PBGC) to issue regulations simplifying and modifying the current required notices and disclosures to employees to help employees be more aware of their rights, benefits, and risks associated with their benefits, and to reduce unnecessary costs and burdens in providing participants with important information.
- Clarify Fiduciary Rules Applicable to Environmental, Social, and Governance (ESG) Investments. Clarify how the general ERISA prudence rule applies to ESG investments to provide employers and fiduciaries with greater certainty about whether and under what circumstances such investments may be provided under a plan.
- Expand the Ability of Plans to Self-Correct Plan Errors. Expand the extent to which employers and fiduciaries can correct plan errors under the IRS’s Employee Plans Compliance Resolution System (EPCRS) and the DOL’s Voluntary Fiduciary Correction Program (VFCP), including increasing the opportunities for self-correction of common, routine errors without the costs and burdens of seeking IRS or DOL approval.
Part D: Enhance Retirement Outcomes by Modernizing Distributions Options
- Provide Lifetime Income/Annuity Provider Selection Fiduciary Safe Harbor. Direct the DOL to issue regulations, in consultation with Treasury and the IRS, providing for one or more safe harbors relieving fiduciaries of liability for annuity provider selection and contract terms (including fees).
- Relax Required Minimum Distribution (RMD) Rules. Modify the RMD rules to improve the retirement income distribution options that can be provided under defined contribution plans, including delaying the required beginning date to recognize improved mortality, exempting smaller account balances from the RMD rules entirely, and making sure that the RMD rules don’t interfere with reasonably managed, annuity-like, spend-down options (including longevity annuity-type options).
Advocacy effort kickoff
“Our national retirement policies must support the continued growth and success of the defined contribution plans to guarantee that workers can enjoy retirement,” said Aliya Robinson, Senior Vice President of Retirement and Compensation Policy, ERIC. “ERIC will work with lawmakers and regulators to promote changes to the retirement system that respond to current needs and protect the future savings of employees.”
ERIC will be advocating for the legislative and regulatory changes called for in these proposals, working with its large employer member companies to ensure that policymakers appreciate that now is the time to modernize defined contribution plans.