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Mark Miller: Remaking Retirement

The 2019 Retirement Landscape

State-sponsored retirement savings programs, the meltdown of multiemployer pension plans, and best interest regulation are among the top retirement topics this year, says contributor Mark Miller.

What's the best way to get more people to save for retirement on the job? In 2019, a large national experiment will take shape that tests two very different approaches.

Some large states--including California and Illinois--will launch state-sponsored programs that mandate participation by employers. Meanwhile, Congress likely will approve a new type of 401(k) aimed at small employers that relies on voluntary employer participation. 

But new ways to save will be just one of several important stories worth watching on the retirement beat in 2019. 

Congress will try to reach agreement on a plan to avert an insolvency crisis in multiemployer pension plans, with the fates of more than one million workers and retirees at stake. 

And the U.S. Securities and Exchange Commission will move toward adoption of a so-called regulation best interest standard following this year's death of an advice standard created by the Obama-era Department of Labor.

Workplace Retirement Saving
Experts agree that the workplace is the most effective place to get people saving, due to the automatic payroll deductions, tax breaks and matching contributions often offered by employers. Yet one third of private-sector workers had no access to an employer-sponsored retirement plan in 2016, according to the United States Government Accountability Office. The coverage shortfall is greatest among low-income workers and people working for small companies.

Last year, the Pew Charitable Trusts surveyed more than 1,600 small- and medium-sized business owners about the barriers they face offering retirement plans to their workers; most often, they cited expense, limited administrative resources, and lack of employee interest as top reasons for not offering retirement plans.

The idea of government-sponsored retirement plans dates back to the Obama Administration, which proposed a national "auto-IRA" program as early as 2010.

The proposal required employers who didn't offer their own retirement plans to enable worker contributions via payroll deduction to IRAs that would be managed by third-party financial services providers. The idea was to reduce paperwork burden and cost; it did not require employer matching contributions and even included a tax break to cover cost of the payroll setup.

But the auto-IRA died in Congress following passage of the Affordable Care Act due to its mandatory participation feature;the partisan fight about the healthcare law had made toxic any proposal containing the word "mandate."

The auto-IRA had very bipartisan roots, notes Mark Iwry, a key architect of the proposal. Iwry served as a senior advisor to the Treasury secretary in the Obama administration, and currently is a nonresident senior fellow at the Brookings Institution.

"Purported concerns about a 'mandate' have served largely as an excuse for inaction on coverage," he says, noting that the idea was first rolled out at the conservative Heritage Foundation in 2006. "The auto IRA proposal enjoyed as much co-sponsorship and support from Republicans as from Democrats--including endorsement by both 2008 presidential candidates McCain and Obama."

After the national proposal failed to gain traction, a number of states began investigating the idea of taking the idea local--and 2019 is the year when some very large plans will roll out.

Oregon started its plan last year; California and Illinois will start in 2019; Vermont, Maryland, and Connecticut are preparing to begin programs, and New York has passed legislation and is establishing a board to oversee the start of a state program over the next two years. New Jersey also is close to approving a plan.

The states that have approved plans could eventually extend coverage to 15 million workers, AARP estimates.

California's plan alone could cover 7.5 million workers. The CalSavers program is in a pilot phase through the end of June and will be open to all employers beginning July 1; mandatory compliance will phase in with three waves from 2020 to 2022 based on employer size.

Meanwhile, Congress likely will approve legislation clearing the path for a more voluntary approach. The idea is to make it easier for employers to band together to join a single 401(k) plan that they can offer to employees. These "open multiple employer plans" would be offered by private plan custodians; the aim would be to offer employers low-cost plans featuring simplified paperwork.

Open MEPs are a key component of broader proposed legislation, the Retirement Enhancement and Savings Act. Another key component would make it easier for employers to include annuities in workplace retirement plans by their fiduciary responsibilities when selecting annuity providers.

"I'm very bullish on action this year," says Shai Akabas, director of economic policy at the Bipartisan Policy Center. "A great deal of legislative work already has been done on this, and support for it is very broad."

What's the better approach--auto-IRA or open MEP? Iwry sees the two ideas as complimentary, rather than competitive, with auto-IRAs serving as starter accounts likely to lead many more employers adopting 401(k) plans.

"It really represents two attempts to do the same thing," says Joshua Gotbaum, a guest scholar at the Brookings Institution and chair of the Maryland Small Business Retirement Security Board, which is spearheading development of the state's auto-IRA program.

Multiemployer Pension Meltdown
Did I mention that more than a million retirees and workers are facing sharp cuts in promised pension benefits, and that a key federal insurance program is facing insolvency? That is the financial disaster that a special congressional committee is racing to avert.

The problem centers on so-called multiemployer pension plans. More than 10 million workers and retirees are covered by 1,400 of these plans, which are created under collective bargaining agreements and jointly funded by groups of employers in industries like construction, trucking, mining, and food retailing.

Plans covering 1.3 million workers and retirees are severely underfunded--the result of stock market crashes in 2001 and 2008-2009, and industrial decline that led to consolidation and declining employment.

Meanwhile, the Pension Benefit Guaranty Corporation, the federally sponsored insurance backstop for defunct plans, projects that its multiemployer insurance program will run out of money by the end of fiscal 2025, absent reforms.

Congress approved an overhaul in 2014, the Multiemployer Pension Reform Act, but the legislation has faced strong resistance from retiree organizations, consumer groups and some labor unions. It allows troubled plans to seek government permission to make deep cuts in benefits for current and future retirees, if they can show that the reductions would prolong the life of the plan.

Last year, the special congressional committee planned to create a replacement for the Multiemployer Pension Reform Act that would be more worker-friendly but missed an end-of-November deadline to issue its recommendation. But the draft plan that has been circulating in Washington raises the guaranteed minimum benefits that would be paid by corporation to retirees and workers in failed plans. It also would inject federal funds into the PBGC--perhaps $3 billion annually--to expand the agency’s partition program, which allows it to take on benefit payments to so-called orphans--people who earned benefits from employers who have dropped out of plans, often because they have gone out of business.

Best Interest Regulation
Will the fight over regulation of financial advice ever end? No finale is in sight this year.

I refer to the long-running battle to require brokers to look out for the best interests of clients. Registered investment advisers already adhere to a strict requirement to put the best interest of clients ahead of their own, and they are fiduciaries. A rule promulgated by the Obama-era Department of Labor would have brought brokers under a similar standard for any advice offered on retirement accounts, but it died an unceremonious death last year.

The SEC is moving toward adoption of a so-called regulation best interest standard. The SEC rule would require brokers to put their customers' financial interests ahead of their own, but it does not require them to act as fiduciaries. The rule also would require disclosures to clients of any potential conflicts, and it reaffirms existing higher standards for registered investment advisers.

The draft regulation has come under fire from consumer advocates who note that it does not clearly define the term "best interest" and that the proposed disclosure forms are confusing for investors.

The disclosures are a key component of the proposed rule, but usability testing conducted last year of the forms brought up numerous serious problems. The tests--conducted by AARP, the Consumer Federation of America, and the Financial Planning Coalition--showed investors didn’t understand the form’s legal disclosures or the term "fiduciary standard." They also didn't understand the term "best interest" and other key components of the disclosure.

The SEC is expected to release a final rule in the second half of this year. 

Mark Miller is a journalist and author who writes about trends in retirement and aging. He is a columnist for Reuters and also contributes to WealthManagement.com and the AARP magazine. He publishes a weekly newsletter on news and trends in the field at https://retirementrevised.com/enewsletter/. The views expressed in this column do not necessarily reflect the views of Morningstar.com.