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February 2010 pension legislative outlook – Administration and Congressional initiatives

Feb 04, 2010

On January 25, 2010, President Obama announced five "middle class" initiatives, two of which – automatic workplace IRAs and an expanded Saver's Credit – directly involve retirement policy. These initiatives were also mentioned in the President's State of the Union speech and are expected to be in the administration’s 2010 budget.

We have discussed both of these proposals in detail in our May, 2009, legislative outlook. In this article, we review each briefly and then discuss their significance for larger plan sponsors. We conclude with a brief update on the other "hot" issues we have been following – defined benefit (DB) plan funding relief, 401(k) fee disclosure and participant investment advice legislation.

Automatic workplace IRAs

Below is the description of the automatic workplace IRA proposal provided in the fact sheet released by the White House on January 25:

The Obama-Biden Administration will promote the establishment of a system of automatic IRAs in the workplace by requiring employers who do not currently offer a retirement plan to enroll their employees in a direct-deposit IRA unless the employee opts out. The contributions will be voluntary and matched by the Savers Tax Credit for eligible families. The Administration is also streamlining the process for employers to automatically enroll workers in 401(k) plans, which has been shown to boost participation, especially for low- and middle-income workers.

How will this affect larger employers that already sponsor one or more retirement plans? One would expect that, generally, large employers who maintain a retirement plan will be exempt. However, the devil is in the details. For example: What about a company that covers most employees but excludes one division – would an automatic workplace IRA have to be set up for that division? What about a company that excludes part-time or temporary employees? What about a company that makes employees wait one year to participate?

There are, as yet, no official answers to these questions, and they may be an element of the debate when this proposal is taken up by Congress. A mandate to provide excluded or part-time employees with an automatic workplace IRA may create an administrative burden for some employers who currently maintain broad-based retirement plans. How onerous that burden will be also remains to be seen. Basically, we need more detail before the effect of this proposal on larger employers can be evaluated.

Saver's Credit

Below is the description of the Saver's Credit proposal provided in the fact sheet released by the White House on January 25:

The Administration proposes to help working families save for retirement by expanding and simplifying the Saver's Credit to match 50 percent of the first $1,000 of contributions by families earning up to $65,000 and providing a partial credit to families earning up to $85,000. The Administration will also make this tax credit refundable to ensure that millions of additional middle-income families can take advantage of it even though they have no income tax liability.

This proposal more or less tracks last year's budget proposal, which was reflected in a bill introduced by Congressman Pomeroy (D-ND). We discuss last year’s proposal and Congressman Pomeroy's bill in detail in our May, 2009, legislative outlook.

If implemented, this proposal could be useful to many 401(k) plan sponsors. It provides, in effect, a taxpayer-funded matching contribution for contributions by low-paid employees. To the extent that a sponsor is using matching contributions to motivate low-paid employees to make 401(k) plan contributions, the "expanded" Saver's Credit might allow elimination of those contributions.

How will Congress pay for this?

Automatic workplace IRAs will have some budget impact – IRA deductions will reduce revenues. Because most of the "new savers" the automatic workplace IRA proposal would create are likely to be low-paid, low-tax bracket employees, however, that impact is likely to be insignificant. On the other hand, the expanded Saver's Credit, which will affect a much broader segment of the population, looks very expensive. Given current concern over the budget deficit and the number of competing proposals to be funded, it is unclear how the expanded Saver’s Credit would fare through the budget process.

Other initiatives

In our most recent legislative outlook, we described our understanding of the current pension policy dynamic: Though DB funding relief has the attention of Congress, it remains unclear whether there is room on the legislative agenda for it.

Currently, the obvious legislative vehicles to which DB funding relief could be added are a jobs bill or tax extenders legislation. Thus, an early "pivot" from health care to jobs could be the occasion for bringing up and passing DB funding relief. But – with the health care issue still very far up in the air – what will happen is anybody's guess.

If a DB funding bill moves, then action on 401(k) fees disclosure is also possible, though not necessarily likely. While the House is well-along in consideration of 401(k) fee issues, the Senate is not and, as we understand it, key Senators remain uncomfortable with legislation at this time.

Participant investment advice legislation is, as we understand it, even less likely. The Office of Management and Budget is said to be targeting February for approval of the Department of Labor's new advice proposal, and that regulation – as opposed to legislation – will likely be the next step.

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We will continue to update you as more specifics are made available with respect to these proposals.