Benefits Biz Blog
Baker & Daniels' BEC Team: June 2008 Archives
Ways and Means Committee to Discuss IRAs
Written by Nick Curabba
In advance of today's hearing of a subcommitee of the
The hearing before the Select Revenue subcommittee is expected to begin this morning at 10:00 and will explore, among other things, an idea that has garned a lot of attention recently -- namely, the concept of requiring employers to default employees into an "automatic" payroll deduction IRA. The idea has been touted by J. Mark Iwry, a former Treasury Department official during the Clinton Administration, and current nonresident scholar at the Brookings Institution in
The JCT publication discusses some of the automatic IRA proposals that have been introduced in both the House and Senate in the past year. Today's hearing will likely focus most particularly on H.R. 2167, the Automatic IRA Act of 2007, a bill introduced by subcommittee Chair Richard Neal (D-MA). The Neal bill, which closely mirrors the Iwry proposal, would require employers that do not sponsor a retirement plan for their employees to offer a payroll deduction IRA program to their employees.
According to the JCT report, the bill also "includes a default for any employee who fails to make an election under which payroll deduction contributions for the employee automatically begin to be made to an IRA established for the employee. The proposal contemplates that the automatic enrollment contribution rate for employees who fail to make an affirmative election would be at three percent of compensation (but not more that the IRA dollar limit for the year). The proposal also requires employers who maintain a retirement plan to offer a payroll deduction program to employees not covered under the plan with certain exceptions. The proposal allows a newly created Thrift Savings Plan (“TSP”) board (the “TSP II Board”) that would have authority to provide for annual increases but not to a percentage that exceeds eight percent of compensation.
"The proposal provides specified default investments which include a life cycle fund similar to the life cycle funds offered under the TSP or such default investments as the TSP II Board specifies for automatic IRAs in regulations. The proposal directs the new TSP II Board to take into account the DOL regulations for default investment under qualified employer plans with automatic enrollment. The proposal also provides that the exception from the ERISA fiduciary requirements for participant-directed investments applies within seven days after the individual receives notice that an automatic IRA has been established for the individual. Finally the proposal provides that any State laws that conflict with the provision for automatic IRAs are preempted."
The proposal has received mixed reviews, with supporters suggesting it will result in more new savings, while detractors worry about mandating new plan design features in what historically has been a voluntary system. In a way, the structure of the automatic IRA is not new. Aside from its manadatory nature, it is much like the "old" 403(b)" market: an employer based, individually employee owned product
403(b) Commissions: In Defense Of (Reasonable) Compensation
With all the focus being paid these days to those "evil" 403(b) commissions, we think it's time to present an argument in defense of reasonable compensation. It is true that, because of the commissions that are paid some 403(b) products charge fees that are higher than others. And it is true that the prospectuses and other sales material which purport to disclose sales commissions aren't always the model of transparency. It is also true that some salespersons are less than upfront with their sales practices. But, as is true in every other profession, there are good 403(b) salespeople and bad 403(b) salespeople.
So let's, just for a moment, speak of the good sales folks and financial planners who sell 403(b) annuities. Last year, I mentioned to a DOL lawyer who was speaking to a trade group in D.C. that it doesn't matter how many laws, rules or incentives you pass in order to convince small employers to adopt retirement plans. You really will have no success increasing employer coverage in that market unless you have someone knocking on those employers' doors and helping them adopt retirement plans -- as has happened over the decades in the 403(b) market. Regulators should not expect these folks to do this gratis any more than any government staffer should be expected to work for free.
Most of the 403(b) sales professionals I know are very interesting people, with particular connections to the 403(b) market. Many of them are former teachers, coaches and nurses (and so 403(b) participants themselves). Many are passionate about their work, and spend long hours traveling long distances to enroll employees in 403(b) plans. I even have a few agent friends in Alaska who are bush pilots who fly to distant villages to enroll employees. Many also have a high degree of technical competency in retirement plan consulting in order to help small employers deal with the myriad of technical issues which arise on any given day. They often act, in effect, as an extension of the charity's or school's HR department, for which the tax-exempt need not pay.
Think of the typical enrollee -- a teacher, nurse or employee of a charity -- whose pay is often modest. There are not large dollars at stake, and the commissions earned on any typical policy is, commensurately, not large.
I do not argue in defense of those unethical salesmen who sell the wrong product at the wrong fee to the wrong person. There are employers and employees for whom some of the products are unsuitable. But, as we issue new RFPs to support the new regulations, we are finding that there are very real services being provided in this market. As commissions are cut out of the new 403(b) products, it is also a choice to cut out a level of plan services. And some of the services, such as bush pilots performing enrollment services, will not be able to be replicated.
Automatic Annuitization Proposed
Written by Nick Curabba
Defined contribution plan participants would automatically get temporary annuity-like benefit distributions under a new proposal floated today by several authors affiliated with the Retirement Security Project. The proposal, contained in a paper by William Gale, Mark Iwry, David John, and Lina Walker, would permit (not require) plan sponsors to provide two-year "test drive" annuity-like payments from a portion of their 401(k) account balance upon retirement. After the initial two-year period, the participant could elect to continue the income stream for life, or elect to have his or her account balance distributed in any other way permitted by the plan.
According to Iwry and Walker, who described their proposal at a Brookings Institution conference yesterday, the automatic, temporary nature of the proposal is intended to get participants used to and educated about the virtues of annuitization. After two years of receiving a steady stream of retirement income, the authors hope more will choose to continue to annuitize for life. Much like prior RSP proposals to encourage automatic enrollment 401(k) plans, this proposal would also automatically continue the annuity income payments for any participant who does not affirmatively elect to opt out after the two-year period.
Given the success Iwry and company had with the automatic 401(k) idea, we expect at the very least for this proposal to be seriously considered by Congress next year, and could very likely see some movement toward enactment.
