Each year, our annual Regulatory Update covers the regulatory, litigation and legislative updates and changes that are affecting plan sponsors and their retirement plans. This year’s annual Regulatory Update has significantly shifted from regulation to litigation. The last two publications focused largely on SECURE 2.0 provisions and their impact on retirement plans. SECURE 2.0 remains an active topic in our industry, as many mandatory and optional provisions continue to take effect. However, the litigation focused on plan sponsors and governmental agencies has taken the spotlight.
Today, we are covering the legislative updates feature in this year's Update.
Retirement Plan Legislative Update
U.S. worker's inability to access retirement savings vehicles is cited as one of the major reasons for a looming retirement savings crisis. A 2023 Bureau of Labor Statistics reported* that 73% of civilian workers had access to a retirement plan, but only 56% were participating. The report also stated that only 49% of lower-wage workers (those in the lowest quartile) had access to a retirement plan. Company size also impacts access to a retirement plan, as the report indicated that only 57% of companies with less than 100 employees offered a retirement plan.
Over the past 10 years, legislative actions seeking to address these access and participation issues have come from state legislatures. Twenty states have passed legislation, with 11 active programs and nine being launched soon. While each state has its own unique plan, most share a general focus of requiring employers to provide access to retirement savings vehicles. Most of the legislation established state-run IRA programs. Employers who do not offer a retirement plan must allow employees to make voluntary deferrals into the state-run option. Employers that offer or establish a retirement plan are exempt from the requirement.
Criticism of the state solutions typically focuses on a lack of consistency in the programs and the fact that they do not cover all American workers. Earlier this year, Richard Neal (D-Mass.) introduced a bill to establish a federal auto-IRA program for employers with over 10 employees. This appears to be a national solution mirroring many of the state plans. The current bill includes a 6% default contribution rate that would auto-escalate up to 10%. While the bill has a 2026 effective date and has some industry support, its likelihood of passage this year is unclear.
While a federal solution is not currently in place, the SECURE 2.0 legislation included several provisions designed to improve employer adoption of retirement plans. To encourage more employers to start plans, small employers (under 100 employees) can receive up to a $5,000 tax credit for three years for establishing a plan. To increase participation, any new plan started after 2025 must include auto-enroll at 3% and auto-escalate at 1% yearly to 10%. Finally, to encourage lower-income workers' participation, in 2027, the Saver’s Credit will be modified to allow for a contribution of up to $2,000 from the federal government into the participant's retirement account. These provisions aren’t as impactful as the state solutions but show interest at the federal level in improving American’s retirement security.
Bill to Allow CITs in 403(b) Plans Introduced in the Senate
Senators have introduced bill S.4917 to allow Collective Investment Trusts (CITs) to be used in 403(b) plans. This mirrors the bill previously approved by the U.S. House of Representatives in March. CITs are pooled investment vehicles organized as trusts maintained by a bank or trust company. They generally offer lower-cost investment options and are usually only allowed in 401(k) and defined benefit plans.
The legislation seeks to complete what was started in SECURE 2.0. That legislation included a provision to allow 403(b) plans to use CITs but did not include the necessary changes for the Office of the Comptroller of the Currency (OCC) and state banking regulators to oversee the CITs. Passing the bill will allow the provision in SECURE 2.0 to finally be available for 403(b) plans.
The growth in popularity for CITs is not surprising, given consultant familiarity, pricing flexibility, daily valuation, improved reporting, and transparency. Expanding this availability already offered in 401(k) plans to 403(b) and governmental plans makes sense. One of the benefits of offering CITs is the lower cost, especially in the era with an increased focus on investment fees.
Some of the risks plan sponsors will have to consider are the asset requirements to be eligible for CITs, the liquidity if they move away from the product in the future, and the extensive trust paperwork involved in establishing the CIT.
Our next blog in our series featuring this year's Regulatory Update will focus on updates from the Department of Labor.
You can download a copy of our complete 2024 Regulatory Update here.
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