The SECURE Act, ESG, missing participants, private equity, the fiduciary rule—there are A LOT of issues with which the retirement plan industry currently wrestles.
“It’s going to be a very interesting year legislatively and with the new administration,” Preston Rutledge said matter-of-factly.
Specific to plans, he’s bullish on ESG, proud of electronic delivery, pro-PEP and private equity, and thinks lifetime income is a long time coming.
He wants more opportunities and options to combat both low interest rates and high fees.
He jokingly refers to himself as a “swamp creature” and lives and works within sight of the Capitol, affording him a bird’s-eye view of the legislative and regulatory architecture on which it rests. It’s the reason now, with a new administration, he’s so sought after.
Arriving at The George Washington University in the summer of 1980, Rutledge’s impressive Beltway notches include working with top political players. A sample:
- As senior counsel to Republican Sen. Orrin Hatch, R-Utah, he drafted the Retirement Enhancement and Savings Act (RESA), considered to be the SECURE Act’s precursor.
- Early on, he clerked on the United States Court of Appeals for the Fifth Circuit, recently famous for striking down the Department of Labor’s fiduciary rule.
- Speaking of the DOL, he capped his government tenure as Assistant Secretary of Labor for the Employee Benefits Security Administration (EBSA).
We’d continue but for space. Rutledge’s hand in developing, if not actually writing, important retirement plan regulations means he’s extremely valuable in determining what’s next.
It’s a reason he formed the Rutledge Policy Group, which provides “non-partisan, business-centric knowledge of current legislative and regulatory trends and their future implications in the areas of retirement savings and employee benefits.”
Free from political constraints, he offered practical answers and professional advice. Yet mindful of D.C. diplomacy, he carefully avoided criticizing, or even commenting on, his regulatory peers; for example, politely refusing to discuss anything SEC- or Reg BI-related.
Everything else was on the table, and he began with EBSA’s recent guidance on missing participants.
Missing Participants
The guidance isn’t so much about finding missing participants, he noted, rather best practices for not losing them in the first place.
“That’s better than a more prescriptive approach,” Rutledge said. “But the missing participant issue will continue to evolve.”
Meaning a possible next step might involve the Social Security Administration or PBGC’s help.
“The PBGC already has a missing participant program for terminated 401k plans. Perhaps they could expand it to plans that are still up and running. There are possible initiatives the administration could implement around this, and there have been legislative proposals, as well.”
Would missing participants be a primary concern for Rep. Richard Neal, D-Mass., the powerful chairman of House Ways and Means and a retirement policy point person?
“He has a laser-like focus on the three automatics: automatic retirement plans, automatic enrollment, and automatic escalation,” Rutledge countered.
He instead identified Senators Steve Daines, R-Mont., and Elizabeth Warren, D-Mass., as major proponents of missing-participant legislation, a more of a realistic possibility “post-Georgia runoff.”
Missing participants were an EBSA priority during his tenure. He bluntly told 2019 NAPA 401k Summit attendees that if assets aren’t available for workers when they retire, what’s the point?
“We do all this work to get plans set up and people into them,” he said when asked about the remarks. “We also do so much to get them to accumulate assets. If we can’t find participants when they hit retirement age, it’s a faceplant, and I use that term deliberately. It’s something we don’t want.”
Electronic Delivery
His second point directly connects to his first. The rule to permit electronic delivery of retirement plan disclosures was a significant win for Rutledge, and part of his EBSA legacy.
“It’s well-received in the planning administration community,” Rutledge beamed. “Electronic disclosure received a kickstart in the spring of 2020 because of the COVID crisis, when EBSA allowed electronic disclosure to be broadly used by both health and retirement plans in light of the closure of many businesses, including commercial printers.”
Operations under the rule are “ramping up and well underway” and will be utilized more heavily in 2021.
“And I have every confidence we will realize the estimated cost savings,” he predicted, referencing the DOL’s claim that electronic delivery would save an estimated $2.4 billion net cost over the next 10 years for ERISA-covered retirement plans by eliminating materials, printing, and mailing costs associated with furnishing printed disclosures.
He added a surprising caveat; a possible return to a paper disclosure default, something for which two major trade groups are lobbying.
“That would be bad policy. We utilize improvements in technology in every area of our lives, and we should do the same with 401k administration.”
Notably, electronic delivery potentially helps with the missing participant issue. He reiterated that the best way to avoid missing participants is simply not to lose them. If an email address is invalid and bounces back, employers are immediately aware that the participant is missing. The electronic disclosure rule then requires the employer to promptly remedy the defective address.
“People also tend to keep their personal email addresses much longer, even after they’ve changed their physical address,” Rutledge explained. “So, it all comes together in a way that helps not just participant disclosure, but also helps employers not to lose track of their employees once they’ve left employment.”
Environmental, Social, and Governance
The outlook has brightened substantially for the inclusion of ESG investment options with qualified plans, especially when comparing the new administration’s attitude on the subject with its predecessor.
Indeed, The Washington Post reported in January that President Biden had ordered a review of a “recent Labor Department rule preventing environmentally sustainable mutual funds from being default retirement investments.”
“The Biden administration will approach ESG in a way that accommodates the use of ESG-themed funds, perhaps as the plan’s qualified default investment,” Rutledge agreed. “That’s the one line that the last administration would not cross.”
A complicating factor is that the Trump administration’s ESG rule is final and effective and, therefore, cannot be pulled back quickly and easily. How the Biden administration accomplishes its ESG goals, and the extent to which it will go is yet to be determined.
“If they issue a new rule, they will certainly rewrite the preamble, which is the narrative that precedes the actual regulatory text,” Rutledge explained. “They certainly could rewrite the preamble with a more pro-ESG tone. I think one of the things that drove a lot of folks to oppose the [Trump administration’s] rule was the fairly negative preamble about ESG. The department had a lot of skepticism about it. However, I very much doubt you’ll see any more ESG enforcement letters, at least for a while until the Biden administration settles in on its position.”
Pooled Employer Plans
Top of mind for implementing the SECURE Act will be whether the DOL publishes prohibited transaction exemptions to provide clarity around fees and proprietary products for pooled plan providers.
The department predicts significant interest in the use of pooled employer plans, or PEPs. Even without much guidance, around 60 companies have already signed up, with the establishment of many more expected.
“People are waiting to see how the other regulations roll out before they jump in, and 2022 might be the big year,” Rutledge said. “I consider it an opportunity as well as a challenge; a challenge in terms of when we see proposals from the DOL, will they be overly prescriptive, or will they leave gaps? Do they leave participants and employers vulnerable in ways that they should not?”
The opportunity is obvious; to be part of the 401k system of the future, one with much larger plans, better scale, lower fees, and higher returns.
We pushed back, noting the controversy surrounding the plans. Critics contending coverage options for smaller companies already exist, and there’s a potential for abuse by unscrupulous retirement plan professionals.
“The system has to evolve and adapt,” he calmly answered. “The criticism is useful in that we see warning signs of things to not do from the get-go. It means PEPs will eventually be established and operated, and in a better way, and people can see around the corner a little bit.”
The fees are dramatically higher for small- to medium-sized employers with assets under management below a certain threshold. Scale is needed to lower costs and expenses, and in that regard, PEPs will prove useful, he added.
Having so many experienced people examining PEPs helps in the long run.
“When I was at the DOL, we would roll out a proposed rule and sometimes get a blizzard of criticism and public comments. I always took it as a positive. We would look at the comments and see the expertise outside of Congress and the administration. We needed their input, thoughts, and warnings to avoid pitfalls. I don’t remember a single proposed rule where a change wasn’t made to improve the final rule based on those comments, so they’re helpful.”
Specifically, with PEPs, the informal comments he’s seeing are helpful, and when rule proposals begin, those comments will be formalized.
“I think we’re on the right track, and I’m very optimistic.”
Lifetime Income
The potential SECURE 2.0 legislation championed last year by Rep. Neal and Rep. Kevin Brady, R-Texas to include safe-harbor, deferral-only “automatic 401ks” brings with it a possible guaranteed life income provision, which Rutledge believes will “push the envelope” on decumulation provisions.
“It would require that at least 50% of a participant’s vested account balance be available for a guaranteed lifetime income product of some kind,” he noted. “That could be a lifetime income game-changer for defined contribution policy in the United States. It’s been a long time coming.”
Mentioning the demise of defined benefits and the rise of defined contributions, he argued that lifetime income “is one of the biggest things we’ve lost.” The legislation’s thrust is to implement automatic 401ks to improve access, automatic enrollment to improve coverage, and automatic escalation to improve asset accumulation.
“It’s the trifecta. Throw in lifetime income provisions for decumulation, and it would cover the waterfront.”
Private Equity Menu Options
Controversy has swirled for some time over allowing private equity investment options in 401k-plan menus. Proponents argue it provides the potential for much-needed yield, while opponents object that private equity’s complicated nature could expose participants to undue and misunderstood risk with the potential for abuse.
Count Rutledge in the former, and an information letter released by the DOL in June 2020 (after his departure) appeared to open the door to private equity’s qualified plan use.
“Retirement security is what ERISA is all about,” he said. “Interest rates have been low for over a decade, and long-term, low interest rates pose a profoundly serious threat to retirement security. In my view, the policymakers must do something to help 401k plans find higher returns.”
Private equity has the potential to be part of that solution if, in the context of a 401k plan, the relative lack of liquidity, longer investment horizons, and the need for transparent asset valuations can be accounted for.
“The DOL letter responsibly tackled all of these challenges and provided a beneficial roadmap for utilizing private equity in 401k plans in a prudent manner,” he continued. “Beyond private equity, employers need as many options as possible, not fewer options, to help their 401k plans earn higher returns for their workers.”
The Fiduciary Rule
When asked about the fiduciary rule and its many (many) iterations, he was mercifully brief.
“The fiduciary rule was published last July with the historic five-part test. The fiduciary exemption was finalized but not published in the Federal Register before the new administration took office. I expect the Biden administration will decide to begin a new ‘notice and comment’ regulatory effort.”
Positive Outlook
Rutledge was amiable and easy-going throughout the discussion, and true to form, he ended on a positive note.
“As of yet, we don’t know who will be nominated as the next assistant secretary of EBSA, but we know the new principal deputy assistant secretary is a man named Ali Khawar. I know him well; he’s a great choice. He’s a former career EBSA attorney who knows the agency inside and out in both the regional and the national offices.”
Khawar, along with two extremely competent career deputy assistants, means EBSA has “an incredibly talented trio at the top,” something he believes bodes very well for EBSA under the new administration.
“I will also say that I envy the next assistant secretary in having a team like that with whom to work.”