Amid the partisan bickering in Washington, it would be easy to miss that the government is finally doing something about retirement, thanks to U.S. Labor secretary Thomas Perez.
Retirement insecurity is perhaps the most widespread form of economic insecurity. Even among those who are years from retirement, concerns about being able to retire are more widespread than worries about job loss, health care or inequality.
But for most of the past decade, officials in Washington have done little except wring their hands and make speeches. There have been bipartisan task forces and dozens of proposals for tax incentives, more regulation, less regulation and consumer financial education. Nonetheless, there has been no general retirement policy legislation. Sensible proposals that once had bipartisan support, such as the auto-IRA proposal or mandatory automatic payroll savings, became casualties of the Obamacare wars.
The actions of both the Bush and Obama administrations, however well intentioned, mostly ended up making retirement security worse. They implemented the (so-called, anyway) Pension Protection Act of 2006 by overregulating traditional pension plans — making companies more likely to abandon them — and then made that situation even worse by encouraging de-risking via lump-sum payouts instead of purchasing annuities. When its once bipartisan auto-IRA proposal stalled, the Obama administration — to much fanfare — announced myRA, a weak voluntary payroll savings plan that has gone nowhere. When states such as California and Oregon took up the auto-IRA approach, starting their own retirement programs for private workers who lacked them, the U.S. Department of Labor opposed it: DoL officials were more concerned about what they saw as an end-run around ERISA than the possibility of expanding retirement coverage to tens of millions.
Against this sorry history, Labor secretary Perez has led the Obama administration to what can honestly be called a policy revolution. There are lots of pluses and minuses, but taken as a whole the administration’s actions in 2015 will do more to improve retirement security than anything that any other administration or any Congress has done in decades. Here’s a short list of what’s happening:
Finally, there is support for state efforts to expand retirement coverage. After years of DoL opposition to state auto-IRA, or Secure Choice Pension, efforts, last July President Barack Obama announced that the department would support them. In November DoL proposed a safe harbor regulation to make clear that state auto-IRA efforts shouldn’t be preempted by ERISA and that employers that participated in them wouldn’t be ERISA fiduciaries. This means that California, Illinois and Oregon can legally implement the programs they’re considering. Many other states are likely to follow. In the end, the more than 50 million people who now have nothing beyond Social Security will be able to save automatically in retirement programs that will be professionally managed and are low cost (unless they choose to opt out, which they’ll be able to do at any time) — the largest expansion of retirement coverage in more than 50 years.
DoL is rethinking ERISA regulation to encourage retirement saving. Impressively, DoL officials didn’t stop there. They are also rethinking their historical opposition to multiple-employer plans, which serve people in multiple companies. Although DoL remains concerned that allowing such schemes raises the possibility that a plan with many employers will be overseen by none, it nonetheless published a bulletin saying that states can operate such plans and provide the necessary fiduciary oversight. DoL’s openness means that states can offer 401(k)s and other plans that provide both better security and lower costs than IRAs.
DoL is working to reduce conflicts in the marketing of retirement plans. DoL’s proposal to reregulate sales of IRAs and other products by imposing fiduciary standards on their sales is — and should be — controversial. There are plenty of people who question whether DoL has the capability to balance the needs of commerce with the need to protect consumers in what is possibly the single most complex consumer financial product. Nonetheless, it’s clear that this is a major problem and equally clear that no one else in the government was doing anything about it. (The Securities and Exchange Commission was directed to do so by Congress in 2010, but thus far has done nothing. The Consumer Financial Protection Bureau, perhaps a better choice as a regulator, hasn’t acted either.) Perez has argued that DoL will be a more thoughtful overseer in the future than it has been in the past — and he has done so so convincingly that even an intensely skeptical Congress declined to shut down the effort.
Treasury is putting (at least some) limits on discounted lump-sum cashouts. Unfortunately, federal law and policy, by imposing more requirements on defined benefit pensions, are encouraging companies to abandon them. Some have chosen to eliminate their pensions entirely by freezing plans and switching employee balances entirely to 401(k)s. Others have chosen not to eliminate their pensions entirely but to de-risk by transferring their pension obligations to others. Some do so by purchasing annuities from insurance companies, which has the benefit that it preserves lifetime income for their retirees. Regrettably, however, federal regulation actually pushes companies to offer individuals instead a single, discounted lump-sum payment. Those who accept the offer get less value, have no lifetime income and must manage their retirement savings themselves. Sadly, IRS regulations have preserved this perverse incentive, and neither Treasury nor DoL has been willing to require employers to disclose the fact that they’re saving money when employees choose a lump sum. Last summer Treasury did act to prevent companies from offering lump sums to people who already had retired. Nonetheless, much remains to be done.
If the Obama administration follows through and implements the initiatives it started last year, then 2015 may come to be seen as the year that the logjam finally broke and the nation’s retirement needs finally got the action they deserve.
Joshua Gotbaum is a guest scholar in economic studies at the Brookings Institution in Washington. From 2010 to 2014, he directed the U.S. Pension Benefit Guaranty Corp. He is also a member of Institutional Investor’s 2015 Pension 40 .
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