Examination of Retirement Plans Under Trump Administration Microscope
While the incoming Trump administration will likely have its hands full dealing with numerous and varied labor and employment issues, events may force it to face several issues of concern for retirement plans. The effects of a multiemployer system stressed nearly to the breaking point may manifest in more employers seeking to cut benefits for participants and/or partition their plans in an effort to remain solvent. This will place further pressure on the Pension Benefit Guaranty Corporation (“PBGC”), the government backstop for insolvent pension plans, which is itself in dire financial shape. Additionally, the Trump administration will likely be proactive in addressing the fiduciary rules. Early indications are that President Trump’s nominees and delegates will have more authority to enact change than the nominees and delegates of his predecessors.
An Uncertain Future for Multiemployer Funds
Many multiemployer pension plans are severely underfunded, a problem that has grown worse in recent years. In an effort to forestall the looming insolvency of many of these plans, in December of 2014, then-President Obama signed the Multiemployer Pension Reform Act of 2014 (“MPRA”), which allowed pension funds in “critical and declining status” to reduce the accrued benefits of plan participants. The MPRA requires plans seeking to cut benefits to file an application with the U.S. Department of the Treasury (“Treasury”) for approval.
Although nearly 70 plans have declared themselves to be in “critical and declining status,” so far only 10 plans have filed applications to cut benefits. Treasury denied the first four applications, but, last month, it approved the application of the Iron Workers Local 17 plan to suspend benefits, although actual suspension must be put to a vote of the participants.
As more plans approach or enter “critical and declining” status, or those already in such status slide inevitably toward insolvency, the Trump administration will likely see more such applications, especially since Treasury’s recent approval provides some guidance to these plans on how to craft an application. Like the Iron Workers plan that was recently approved for benefit cuts, most of the plans currently in critical and declining status are small plans with less than 5,000 participants. Such plans are more likely to file applications to cut benefits, and many will also seek to partition their plans in an effort to stay afloat.
The probable increase in pension funds applying to cut benefits and partition their plans under MPRA may result in additional pressure to enact legislation to shore up the severely underfunded multiemployer pension fund system.
This leads to another issue that is reaching a crisis point—the PBGC recently saw its multiemployer plan insurance program’s deficit rise to a record high of almost $60 billion. In other words, the government insurer of multiemployer plans is itself going broke—the PBGC is projected to become insolvent by 2025.
The dire financial condition of the PBGC highlights the plight of the underfunded pension plans, as it makes clear that the distressed plans cannot (at least in the long term) rely on the PBGC to make pension payments if the plans fail. With additional funds expected to run out of money or apply for PBGC assistance and the PBGC’s own insolvency looming on the horizon, the pressure on Congress and the new administration to “do something” will likely ratchet up.
But options are limited. If the PBGC further increases the premiums for its multiemployer program, those premium increases could cause more employers to exit the system, exacerbating the problem. According to a Congressional Budget Office study, recapitalizing the PBGC’s multiemployer insurance fund to cover claims filed by distressed plans over the next 20 years would cost $34 billion.
The multiemployer funding crisis could prove to be a significant headache for President Trump, who received the votes of many of the union members likely to see their pensions reduced one way or the other. Epstein Becker Green will continue to monitor these issues.
In the meantime, employers that participate in multiemployer plans should educate themselves on these issues and consult with counsel about proactive steps to consider.
The DOL Fiduciary Rule—What’s Next?
The DOL’s fiduciary rule has been controversial since its onset—with challenges coming from various parties, including the financial industry and various political figures. This rule generally addresses the definition of fiduciary “advice” (and what may or may not meet that definition), sets forth parameters for advisers to act in their client's best interest, lays out rules on accepting compensation (and sheds additional light on types of compensation), and provides for some accountability when incorrect fiduciary advice is provided. With the increased volume of assets in individual retirement accounts and 401(k) plans in recent years, the fiduciary rule has shown a spotlight on relationships surrounding those vehicles. However, the rule could have far-reaching implications and change the way that financial advice is given in other contexts, including considerations for services provided with respect to multiemployer and other pension plans, which are also subject to preexisting fiduciary rules.
There have been various attempts by Republicans to derail the rule, including a measure to repeal the rule and a joint resolution disapproving and nullifying the DOL fiduciary rule (and a veto of such resolutions, coupled with an attempted override of the veto). After this activity, the rule generally was scheduled to be operative in April of this year, with some of the provisions transitioning into effect shortly thereafter. Many Republicans believe that instead of providing more accessibility to better financial advice for Americans, the rule is too complex, it adds costs, and otherwise negatively impacts the investor relationship. Early indications are that the Trump administration will continue to take aim at this rule as Republicans have already introduced legislation to delay the implementation of the rule for two years. If that legislation is enacted, one would think that further ammunition would be aimed at the fiduciary rule (if not from the President, then likely from Republican lawmakers) during the implementation delay, perhaps to completely rewrite it or repeal it altogether. Prior to any repeal, financial advisors, investors, and retirement plans should continue to prepare for the rule and examine their relationships and service agreements.