Fate of Open MEP legislation in doubt amid current political climate
Morningstar research analyst is skeptical that Family Savings Act and RESA will be taken up before the 115th Congress ends.
Despite the longstanding, bipartisan support for legislation that would make it easier for small and midsized employers to sponsor 401(k)s through Multiple Employer Plans, two bills pending in Congress face a doubtful future, according to one economist and retirement policy analyst.
“I’d say that I’m bearish on Open MEPs passing out of this lame duck session,” said Jake Spiegel, senior research analyst at Morningstar, referencing the chances that the Family Savings Act and the Retirement Enhancement Savings Act will be taken up before the 115th Congress closes in 2019.
“I’m skeptical that either will pass,” added Spiegel.
Removing the existing employer commonality requirement for MEP participation is a cornerstone of each bill. Under existing regulation, only employers that share a “nexus,” such as membership in a trade association, can access the full benefits of MEPs, which allow employers to pool employees under one 401(k) plan, creating economies of scale and mitigating individual employers’ fiduciary liability.
Spiegel and two other Morningstar economists published a white paper last year touting Open MEPs, along with a federal mandate to enroll workers without access to an employer-sponsored retirement plan in IRAs, as the most realistic policy approaches to closing the access gap to savings plans. According to data from the Bureau of Labor Statistics, less than half of workers employed at firms with fewer than 50 employees have access to a workplace retirement plan.
Morningstar’s longstanding support for relaxing restrictions on MEPs is indicative of the seemingly unanimous support for the policy within the retirement and service provider industry.
On Capitol Hill, support for Open MEPs has been bipartisan for at least two years. In 2016, RESA, sponsored by Orrin Hatch, R-UT, passed out of the Senate Finance Committee on a unanimous vote.
RESA was reintroduced in both chambers of Congress earlier this year. And the Family Savings Act, one of three bills packaged under Tax Reform 2.0, recently passed out of the House of Representatives.
But as the nation’s capital roils under what is arguably the most politically splintered climate in a generation as mid-term elections draw closer, the fate of advancing sound retirement policy is uncertain, despite bipartisan support, thinks Spiegel.
“There just doesn’t appear to be a strong, vocal constituency demanding this, and the Senate has several more pressing issues at hand,” said Spiegel.
Along with Open MEPs, the Family Savings Act creates Universal Savings Accounts, which would allow anyone over the age of 18 to invest up to $2,500 a year in after-tax dollars that could grow tax-free and be used for any purpose. It also relaxes required minimum distributions for some savers, and allows investors to continue contributions to IRAs after the age of 70.
Those latter provisions are likely to create a hurdle for the Family Savings Act in the Senate, where 60 votes will be needed to move the bill to President Trump’s desk.
If Spiegel’s instinct proves to be correct, it would underscore the challenge of drawing the electorate’s attention—and the subsequent motivation of lawmakers–to retirement policy, an issue that merits scant attention in the mainstream media.
“There doesn’t seem to be a ton of urgency behind the two bills,” said Spiegel. “Retirement is not a sexy issue that is salient for Americans outside of policy circles.”
RESA passed out of committee in the Senate after the 2016 midterm elections. But that momentum was stalled in the flurry of the 114th Congress’s lame-duck session. Spiegel fears both it and the Family Savings Act will suffer a similar fate this time around.
“I think it gets kicked down the road and wouldn’t be surprised to see Open MEPs pop up in the new session and unencumbered by changes to RMDs and Universal Savings Accounts,” added Spiegel.
“Though it’s certainly possible that the Senate kicks back a version of the bill without these provisions to the House, and the House passes it this session,” he said.
Symbiosis between Open MEPs, mandated IRAs
Morningstar’s research underscores why Open MEPs are “unequivocally a good thing,” said Spiegel.
But the paper goes further in advocating for a federal mandate for enrollment in IRAs for workers that remain without access to workplace retirement plans.
That idea was floated in each of President Obama’s budget proposals, none of which initiated momentum on Capitol Hill.
Spiegel acknowledges that a federal mandate is currently “not conceivable.”
The existing state-administered IRA program in Oregon, which was rolled out last year and covers more than 39,000 workers, and the success of similar initiatives in California and Illinois, where programs are approaching initial rollout, will eventually inform the value implementing a federal mandate, said Spiegel.
“States are the laboratory of Democracy,” said Spiegel, quoting Supreme Court Associate Justice Louis Brandeis. “Any sort of federal IRA program would depend on lessons learned from state regulations.”
Several other states are considering mandating participation in retirement accounts, an idea that has the backing of more than a dozen state treasurers, including some Republicans.
“Having a federal system would be more beneficial than a patchwork of state initiatives. But we are not yet at the point where we have a patchwork of state programs. Policy makers at the federal level would like to eventually see some lessons learned,” said Spiegel.
Critics of automatic IRA mandates argue that they create competitive disadvantages for private-sector service providers. Oregon, California, and Illinois are proceeding under the premise that their IRA plans are not governed by the Employee Retirement Income Security Act, which subjects all employer-sponsors of retirement plans to fiduciary obligations and liability. California’s CalSavers program is currently being sued for violating ERISA’s preemptive power over state retirement statutes.
The Investment Company Institute, which represents the interests of mutual fund companies, also argues that state IRA plans will incentivize existing sponsors of 401(k) plans to stop offering savings vehicles, and instead dump employees in state IRAs.
Spiegel says auto-IRAs can “absolutely coexist” with private-sector plans and Open MEPs.
Even with IRA mandates, employers still have strong incentives to offer 401(k)s, which allow for considerably higher annual contribution limits and company matches, notes Spiegel. Auto-IRAs are subject to the contribution limits on IRAs in the private sector and do not allow employer contributions.
“If you are a small business owner, you have a strong incentive to offer a plan,” explained Spiegel, citing owners’ own savings needs, and the tax advantages of their own contributions to the plans they sponsor. “It’s a wonderful alignment of incentives.”
Defining investors
Other more recent Morningstar research from its policy team sets out to establish a broadened definition of what it means to be an investor.
“By learning what it really means to be an investor we can think more critically about ways to help them,” said Spiegel. “Anyone with exposure to markets is someone we consider to be an investor.”
Most investors access markets through workplace savings plans, he said. And 45 percent of investors do not work in white-collar jobs, a fact that contradicts the preponderance of money managers’ media campaigns. “There is an incomplete picture of who investors are,” thinks Spiegel.
Morningstar classifies investors in two groups—the engaged and the disengaged.
Engaged investors tend to be focused on the long term when making decisions and are willing to assume greater risk. Disengaged investors tend to be preoccupied by short-term needs and are much more risk averse.
“We were surprised by how clean the differences are between engaged and disengaged investors. That illustrates the role financial advisors can play, and the need to really reach out and speak to the disengaged investor,” said Spiegel.
Advisors fail their role, and business incentives, by only marketing to the engaged investor and assuming a narrow profile of who can benefit from financial advice.
Financial providers ought not judge books by their cover, said Spiegel. “There is a need for widely accessible, democratized financial advice.”
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