Recent ERISA Advisory Council Report Addresses Closing  the Race, Ethnicity, and Gender Retirement Savings Gap: With SECURE 2.0, Congress Also Looks to Help

By David E. Morse 

The 50% of Americans lacking a workplace savings or retirement plan are disproportionately non-white, ethnic minorities, and/or women. The ERISA Advisory Council’s (Council) 2021 Report to Department of Labor (DOL) Secretary Marty Walsh sought to identify the causes of and possible solutions to closing this coverage gap. (The Council is a bipartisan group of experts established under ERISA to advise the DOL about retirement and welfare plans.) The report offered some practical advice, but missed some low-hanging fruit that could make a significant difference in closing the gap and reducing systemic disparities.

After reviewing the disappointing state of retirement preparedness of millions of Americans, including the demise of traditional pension plans; low savings rates; and difficulty 401(k) and other defined contribution participants have with managing their investments, inflation, longevity, and other retirement risks, the Council’s report directed a laser focus on the retirement plan coverage gap.

Most people without a retirement savings plan at work simply do not save much, if anything. Uncovered workers tend to be part-time, temporary or gig workers, and lower-paid individuals who, in turn, are disproportionately members of racial and ethnic minorities and/or are women. The report also notes other problems affecting retirement security, including leakage (pre-retirement withdrawals), divorce, and financial illiteracy.

More recently, the House of Representatives overwhelmingly passed H.R. 2954, the Securing a Strong Retirement Act of 2022 (SECURE 2.0), by a 414-5 vote, which is pending Senate action. SECURE 2.0 touches on several of the areas addressed by the Council — expansion of group plans, auto enrollment, and effective communication — that are likely to modestly advance the interests of savers and near-retirees but with some unintended consequences; for example, exacerbating leakage by increasing the amount of forced plan rollovers.

Let’s review the Council’s recommendations, whether and how SECURE 2.0 addresses them, and what was left unaddressed by the Council report that could help close the gap and address systemic disparities.

The ERISA Council Report’s Recommendations and SECURE 2.0 Proposed Reforms

The Council had five modest suggestions to strengthen retirement security and reduce inequalities in our existing system.

1. Council Recommendation: Encourage MEPs and PEPs. These group “401(k)s in a box” are (theoretically) much easier for small employers to adopt and administer than single-employer plans. Private sector providers already are using their marketing skills to promote these plans. Curiously, the report does not emphasize the actions the DOL can take to make the adoption of such plans more attractive, such as making it easier for providers and employers to offer MEPs and PEPs, loosening the restrictions on which employers can join a MEP, and minimizing employers’ potential exposure to ERISA fiduciary liability if they sign onto a MEP or PEP.

What SECURE 2.0 Would Do: It would allow for the creation of 403(b) MEPs, which would expand the availability of group plans to nonprofit employers. It also clarifies (slightly) the fiduciary obligations for collecting plan contributions.

2. Council Recommendation: Form an Interagency Working Group. This would bring together the DOL, IRS, PBGC, SEC, and other federal agencies regulating retirement benefits to jointly study and recommend policy updates. The working group could explore the creation of a national entity to facilitate retirement benefit portability (e.g., when folks job-hop or have multiple IRAs) and help unite “lost” participants with their accounts. This idea has been around for years.

What SECURE 2.0 Would Do: It would require the DOL, PBGC, and IRS to study the effectiveness of employee communication and plan information reporting, and report back to Congress on possible improvements. This would be a step in the right direction because many existing communication efforts have fallen short, and this may help Congress finally improve such efforts; for example, the working group could look at what can be done to deal with lost accounts more effectively, a topic addressed below.

3. Council Recommendation: Improve Education and Assistance. Some Council members argued that employers are reluctant to help their workers save, invest, and manage their retirement because of fear of crossing the line between providing education (outside of ERISA’s stringent fiduciary rules) and investment and financial advice (invoking ERISA obligations and possible fiduciary liability). The line between education and advice was drawn by the DOL in 1996 in Interpretive Bulletin 96-1. Updating this Bulletin would be helpful, especially by giving employers more protection from class action litigation by expanding what is considered education. More importantly, expert testimony before the ERISA Advisory Council raised a basic concern going beyond ERISA: People approach savings, finances, and investment differently depending on their income, education, gender, racial, and ethnic backgrounds. Thus, targeted communications and varied messaging can be key to reaching everyone. The DOL can help by highlighting the issue and encouraging employers to offer appropriate tailored messaging.

What SECURE 2.0 Would Do: It does not address financial literacy.

4. Council Recommendation: Improve Information Related to Divorce and Benefits. Although hard statistics were not presented, the Council’s report assumed that many divorcing spouses are unaware of their partners’ benefits and the possibility of receiving a share as part of the settlement. Of course, that is a largely a state law issue of what information a spouse must share and who gets what, but it might help if the DOL conducted an information campaign targeting both the general public and divorce lawyers. A more practical solution offered was for the DOL to issue model qualified domestic relations orders (QDROs). Any practitioner who has reviewed purported QDROs for compliance would agree that divorcing couples and their advisors could use the help.

What SECURE 2.0 Would Do: It would add some protections and incentivize employers to assist military spouses. Perhaps the IRS/DOL/PBGC study created by the bill could consider improved explanations of spousal rights and QDROs.

5. Council Recommendation: Put Retirement Savings on Auto-Pilot. A workplace program in which employees automatically save a portion of each paycheck and invest it in a diversified “do it for me” fund (with simple procedures to opt out) is the most effective tool available to help folks save. It would be even better if the savings rate escalated 1% annually to, say, 10% or 15% and non-savers were periodically reenrolled, again with opt-outs. The Council and several of the experts testifying recommended that the DOL encourage employers to add auto features to their 401(k)s, but were silent about how that could be done.

What SECURE 2.0 Would Do: It would require new 401(k) and 403(b) plans to enroll participants automatically and would escalate their contribution levels (with opt-outs). Unfortunately, the effectiveness of this excellent change is greatly diminished because existing plans are grandfathered. Given that plan administrators have already added auto-pilot into their recordkeeping systems and its proven success in increasing enrollments and contributions, Congress should require that all 401(k) and 403(b) plans go automatic.

The Missed Opportunities

The Important Long-term Role of State Auto-IRA Programs. Understandably, the Council’s recommendations focus on encouraging the expansion of ERISA-regulated retirement plans, such as MEPs and PEPs for both for private employer plans and state-facilitated programs. However, we already know from experience that such voluntary arrangements show only modest success. The most significant progress is being made by state-facilitated auto-IRA programs. As of February 28, 2022, almost 450,000 funded accounts have accumulated more than $418 million in the Oregon, Illinois, and California programs. The key to the success for these largely first-time savers — a substantial number of whom are in the same groups that the Council is trying to help — is a state mandate that employers without a retirement plan facilitate the program. With Connecticut having just launched an auto-IRA, soon to be followed by Maryland and a number of states expected to launch next year, the ranks of new savers will continue to grow.

The Council indicated that it believes (incorrectly) these auto-IRA programs lack the consumer protections for participants found in ERISA retirement plans. The reality is that every state program in operation or development provides robust ERISA-like consumer legal protections to ensure that workers and their savings are secure. In a better world, every employer would adopt a 401(k) with auto enrollment, but it is important not to patiently wait for a more perfect solution; state programs can close the access gap now by giving both employers and employees easy access to a simple, lower-cost way to begin to save for retirement. And, anecdotally, we know that some of these employers eventually “graduate” to more robust 401(k) plans.

What SECURE 2.0 Would Do: It would address the coverage gap by requiring plans to cover part-time workers and offer small employers tax credits for adopting plans. These changes are welcome, but many employers have already had access to tax credits and still have not adopted a plan; state programs will continue to fill an important gap by meeting the needs of small employers.

Enhanced Account Portability. Another opportunity for reform overlooked by the Council’s report, but within the DOL’s existing authority, is enhancing portability — making it easier for former participants to manage and perhaps consolidate their various left-behind retirement accounts. A white paper (The True Cost of Forgotten 401(k) Accounts) by the FinTech company Capitalize (full disclosure, I’ve done legal work for Capitalize) estimates that there are more than 24 million “forgotten” 401(k) and other DC accounts, holding more than $1.35 trillion of retirement savings!

A good place to start is the DOL’s rules for involuntary IRAs. The law allows an employer to shed many small accounts ($1,000–$5,000) of former employees by transferring the money into a newly created IRA in the person’s name. The DOL’s fiduciary rules require that the IRA be invested in a “safe” money market-type account. With miniscule current interest rates, the fees charged on the IRA will exceed investment income, gradually wiping out the IRA. Those most harmed by this rule tend to be financially unsophisticated people who frequently change jobs without the time or inclination to track their various accounts. A better approach could be to invest the IRA, after a brief holding period, in a target date, balanced, or other fund suitable to a long-term investor.

What SECURE 2.0 Would Do: It would make this problem worse by increasing the forced rollover/cashout limit to $7,000. On the other hand, the bill would help unite workers with their “misplaced” plan accounts by creating a “Retirement Savings Lost and Found,” to be run by the DOL, with help from Treasury. The Lost and Found would essentially be a national database that participants and their families could use to find forgotten accounts and contact plan administrators. While an important first step, the Lost and Found would be far more effective, however, if employers could use the program to proactively find missing participants and beneficiaries.

The DOL also could help to encourage lower-paid employees lucky enough to be contributing to a 401(k) to make non-deductible Roth, rather than traditional (deductible) 401(k), contributions. The tax deferral from contributing to a traditional 401(k) is unlikely to benefit many lower earners; they’d generally be better off with a Roth with the dual advantage of avoiding most tax penalties in case of early withdrawal and the potential of fully nontaxable retirement income. A push toward Roths, including guidance for employers wishing to nudge or even default certain workers into a Roth 401(k) over traditional 401(k) contributions, could help.

Finally, the DOL, perhaps working with the IRS, could explore opportunities to help folks combine their small former employer and rollover IRA accounts into more meaningful larger accounts.

What SECURE 2.0 Would Do: It would allow for employer Roth contributions, but does not address account aggregation.

Conclusion

The Council’s recommendations, many of which are addressed to some extent in SECURE 2.0, would (modestly) improve retirement security. Although many believe Congress will pass SECURE 2.0, the Council does encourage the DOL not to wait for legislation, but then fails to more strongly recommend where the DOL can act. The DOL should use the authority it has to address as many of these issues as it can; passage of SECURE 2.0 can only bolster such efforts. While SECURE 2.0 is another positive step in the right direction, bolder reforms, similar to those considered but abandoned as part of the Build Back Better Act — national universal access and a refundable Saver’s Tax Credit — ultimately can do much more to close the access gap and reduce inequalities in our retirement system.

David E. Morse is an Employee Benefits Partner in the New York office of the international law firm K&L Gates LLP, Editor-in-Chief of the Benefits Law Journal, and a Fellow of the American College of Employee Benefits Counsel. The views set forth herein are the personal views of the author and do not necessarily reflect those of the law firm with which he is associated.

April 2022, 22-03