Update on Retirement Benefit Legislation

Take-Away: There is a growing sense that Congress will tackle its ‘improved’ retirement planning legislation after the midterm elections, with yet another change in the investment universe of 401(k) plans.

Background: As has been previously reported, there are three separate bills pending either before the House, the Senate, or the Senate Finance Committee dealing with changes to retirement benefits. The most noteworthy is the SECURE Act 2.0 which would extend the required beginning date (RBD) to age 75 (over time) and also providing more relief from existing penalties for excess contributions to IRAs and prohibited transactions with IRAs. Other bills would encourage small employers to adopt retirement plans through tax credits and would provide automatic enrollment/participation in 401(k) plans requiring a plan participant to opt out of an automatic 3% contribution to the plan. Another proposed change would tie the $100,000 limit on contributions to a qualified charitable distribution (QCD) to cost-of-living escalators. You get the picture- a lot of changes, albeit fairly minor, would be part of the bipartisan legislation now predicted to be addressed in earnest after the midterm election by a ‘lame-duck’ Congress.

Nontraditional Investment Bill: Top Republicans on the Senate Banking Committee (Toomey and Scott) recently proposed a bill that purports to permit 401(k) plans to diversify investment holdings to include private equity, hedge funds, REITs, cryptocurrencies, and other alternative assets.

No Fiduciary Liability: The bill clarifies that these nontraditional investment options would not cause the plan sponsors to be viewed as breaching their fiduciary obligations due to the higher level of risk or illiquidity associated with them.

Higher Expenses Authorized:  Additionally, the bill clarifies that expenses related to these nontraditional investments, which are normally higher than traditional mutual funds, would be ‘acceptable.’ [I am not sure what ‘acceptable’ means, but apparently higher expenses associated with the nontraditional investments would not expose the plan sponsor to breach of fiduciary duty claims.]

Department of Labor: You will recall that earlier this year Fidelity Investments announced that it would allow Bitcoin as a 401(k) investment offering. Elizabeth Warren and House Ways and Means Chair, Richard Neal, both publicly expressed concerns about this move. Then came the Department of Labor that expressed concerns that such investments, like cryptocurrency, as part of a 401(k) investment menu option would be highly risky for smaller workplace plans without much participant expertise, and that 401(k) plan managers had to ‘exercise extreme care’ before adding a cryptocurrency option to their investment plan.

Conclusion: We should expect some additional retirement plan legislation before the end of this calendar year, but nothing before the midterm elections. Lots of possible changes will be part of that legislation, but nothing as dramatic as the SECURE Act. Stay tuned.