This is the sixth post in our series about promising proposals to advance retirement security in America.
Over the past two months, BPC has written about how the Retirement Enhancement and Savings Act of 2016 (RESA) could improve retirement security in the United States. If enacted, the legislation would expand access to workplace retirement savings plans, facilitate lifetime-income options, reduce leakage from retirement savings accounts, and improve retirement-related provisions in the tax code.
Enacting this package of reforms would be an important and promising step for retirement policy.
RESA has several other noteworthy provisions that do not fall into any of the aforementioned categories:
Eliminate 10-percent-of-pay auto-escalation limit. Under current law, a retirement plan is exempt from annual testing requirements if an employer automatically enrolls its employees in the plan at a default contribution rate of at least 3 percent and also contributes to the plan, such as by offering a matching contribution that meets certain standards. (Employees may select a different contribution rate or opt out of contributing to the plan entirely.) This alternative to testing is known as the automatic-enrollment safe harbor. The safe harbor also requires adopting employers to automatically escalate the employee’s contribution, such as by increasing the default employee contribution rate by one percentage point each year, to at least 6 percent of pay—but no higher than 10 percent of pay. Such levels of savings are likely insufficient for many individuals to have financial security in retirement. The RESA would eliminate the cap and allow employers to automatically increase their employees’ contributions above 10 percent, thus facilitating increased savings.
Eliminate the age limit on contributions to traditional Individual Retirement Arrangements (IRA). Currently, individuals over age 70 ½ are allowed to make post-tax contributions to a Roth IRA (in which withdrawals are not subject to taxes) but prohibited from making pre-tax contributions to a traditional IRA (in which taxes are deferred until the money is withdrawn). The RESA includes a provision originally proposed by Sen. Ron Wyden (D-OR) to eliminate this age limit for traditional IRAs and harmonize the age-related contribution rules with those of Roth IRAs.
Allow consolidated Form 5500 reporting. Employers that offer retirement savings plans covered by the Employee Retirement Income Security Act (ERISA) must file an annual form with the Labor Department detailing the plan’s operations. This RESA provision—based on a bill proposed by Sen. Susan Collins (R-ME) and Sen. Mark Warner (D-VA), and identical to a recommendation from BPC’s Commission on Retirement Security and Personal Savings—would simplify reporting for employers that adopt a common-plan design. Instead of requiring each employer to file a separate copy of Form 5500, the common-plan administrator would file one copy of the form on behalf of all participating employers, thus streamlining the process and reducing compliance costs. This provision will help to facilitate pooled plans that would serve more than one employer.
Provide relief from annual testing requirements for closed plans. Workplace retirement savings plans are subject to complex annual testing requirements, which ensure that the plans are serving a broad share of each company’s workforce (rather than merely highly compensated executives). If a plan fails nondiscrimination or top-heavy testing, it must take corrective action to expand benefits for non-highly compensated employees (or curtail benefits for highly compensated employees).
These tests have unintended consequences for employers that are transitioning from defined-benefit pensions to defined-contribution retirement accounts. During these transitions, employers close the DB plan to new hires and may also limit additional accruals in the DB plan for remaining participants. As the DB plan winds down, its remaining participants become older and more highly compensated. Without the inclusion of newer, typically lower-earning workers, many of these plans eventually fail nondiscrimination testing with no feasible remedy. The Treasury Department has offered some administrative relief but has not implemented a long-term solution.
The RESA would rectify this problem by allowing testing to be conducted based on aggregate benefit accruals, including all of an employer’s plans (DB and DC). Importantly, employers would not be allowed to increase benefits for employees covered by the frozen DB plan if they wish to take advantage of this provision.
The unanimous, bipartisan support from the Senate Finance Committee for these and other provisions in the RESA gives hope that policymakers can take meaningful action to improve retirement security for Americans. Enacting this package of reforms—whether in the final days of the 114th Congress or in the early days of the new Congress—would be an important and promising step for retirement policy.
KEYWORDS: 114TH CONGRESS, 115TH CONGRESS, DEFINED BENEFIT PENSION PLANS, DEFINED CONTRIBUTION PLANS, DEPARTMENT OF LABOR, INDIVIDUAL RETIREMENT ARRANGEMENTS, IRAS, MARK WARNER, RETIREMENT PROPOSALS, RON WYDEN, SENATE FINANCE COMMITTEE, SUSAN COLLINS