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Wednesday, February 12, 2014

Senator Tom Harkin (D-IA) recently proposed legislative language for his USA Retirement Funds that we initially wrote about last year.  The new proposed legislation would establish these USA Retirement Funds, which would be privately run by non-profits, employer associations, employee organizations, financial institutions and other organizations approved by the DOL.  The Funds incorporate some defined contribution and some defined benefit plan features.

Like a pension plan:

  • The funds would be independently managed, rather than participant-directed.
  • The benefits would be paid over a person’s life with survivor benefits and certain spousal protections (although some DC plans do offer these features as well).

Like a defined contribution plan:

  • It would have employee payroll deduction contributions, more like the current 401(k) plan system, and individuals would be automatically enrolled.
  • Employee contributions would be capped at $10,000/year.
  • Employer contributions would be optional and capped at $5,000/year (indexed for inflation).
  • Individuals could make a one-time, lump sum withdrawal after age 60 for hardship.  Many DC plans allow hardship distributions and/or distributions after age 59 1/2.

All employers (other than governments and churches) with more than 10 employees in the prior year who received at least $5,000 in compensation would be subject to these rules.  An employer would otherwise only be exempt from automatically enrolling its employees in the USA Retirement Funds if it offered a pension or what Sen. Harkin calls a “good 401(k).”  To Sen. Harkin, a “good 401(k)” is one with automatic enrollment and a lifetime income option.  Additionally, frozen pension plans would not count as offering a pension plan for purposes of this exemption under his proposed legislation.

Some other interesting tidbits from the proposed legislative language are:

  • The automatic contribution to the USA Retirement Funds would be 3% for employees who are automatically enrolled in 2015 and would increase 1% per year until 2018 at which point it would be fixed at 6%.  In other words, the level of the employee’s automatic contribution depends on the year in which the employee is automatically enrolled    It does not appear that employee contributions are “auto-escalated” (i.e. automatically increased each year).
  • If an employee opted out of the automatic contribution, or elected a different percentage, that election would be revoked after 2 years and the employee would be reenrolled at the applicable automatic contribution rate unless he or she took action to change it.
  • Each Fund will be governed by a board of trustees of at least 3 people who are independent of service providers under the fund and meet certain other qualification requirements.
  • Each board of trustees must, among other requirements, establish procedures allowing participants to petition the board to remove a trustee and to comment on the management and administration of the Fund.  Additionally, if a Fund has more than $250 million in assets, the participants must be allowed to cast a non-binding vote to approve or disapprove the compensation of the trustees at least once every three years (a trustee “say on pay” if you will).
  • Payments must begin before age 72.  So for participants looking to avoid RMDs, they could push them back a bit by rolling over into one of these funds.

Also buried in the Harkin legislation are some ERISA amendments that would allow open multiple employer plans (the legislation refers to them as “pooled employer plans”), subject to meeting certain requirements.  There are also several additional ERISA changes.

The full text of the bill is available here.

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