House Ways and Means Committee Chair Rep. Richard Neal, D-Mass., waited until April 3, months after Democrats regained the chamber, to formally seek President Donald Trump’s tax returns. As Neal resisted pressure from his colleagues to pull the trigger earlier, he was working with Republicans on finishing a retirement security bill that had been several years in the making.
His colleagues began to suspect the two things were related, a suspicion that was heightened when the committee passed his legislation on April 2 — followed the next day by the long-awaited request.
That bill, the Setting Every Community Up for Retirement Enhancement, or SECURE, Act, got a unanimous vote in the committee, and it’s expected to sail through on the House floor on Thursday and probably find its way to the president’s desk. But in important ways, the measure is a case study in everything wrong with policymaking in today’s Washington.
“One of my top priorities as Chairman of this committee is to help workers of all ages prepare for a financially secure retirement,” Neal said when the SECURE Act passed out of committee in April. “The SECURE Act goes a long way in addressing this problem by making it easier for Americans to save. Passage of this bill is a tremendous bipartisan accomplishment, and I hope to see the measure move through Congress and be signed into law in short order.”
While the SECURE Act, a grab bag of measures that nearly passed in the last Congress, does have some decent features, it also includes one glaring provision that’s been on the insurance industry’s wish list for many years — and does not include the piece of progressive retirement security reform Neal has long said he’s championing.
“This bill is an open invitation to prey upon people who are exceedingly likely to lack meaningful access to a lawyer,” said Jeff Hauser of the Revolving Door Project at the Center for Economic and Policy Research. “The only types of bills [Senate Majority Leader Mitch] McConnell and Trump will sign are bills that enrich America’s worst companies, which is why the primary focus of House Democrats should be oversight rather than bipartisan predation of the non-rich.”
The SECURE Act, on the whole, is a fairly inoffensive law: That’s one reason it’s encountered next to no formal opposition. Some of the provisions are pretty good or, at least, not so bad. The bill would increase the age at which retirees must take money out of their retirement plans, from 70 ½ to 72. It would lift the age cap on contributing money into tax-free retirement accounts. It would let people withdraw money from retirement plans penalty-free in the event of a birth of a child or adoption.
There are also the usual special-interest giveaways: some paperwork reductions, lower government payments for cooperatives and charities (designed, oddly enough, as a handout for the Boy Scouts of America), and changes to the funding of retirement plans for the struggling newspaper industry.
But none of that is what appears to be driving the SECURE Act through Congress. You’d have to look at Section 204 to understand the rationale.
Section 204 gives a safe harbor to 401(k) plan sponsors who select so-called lifetime income products, another word for annuities, to appear among offerings to workers. This would mean that, if an employer picks an annuity provider and it goes out of business or rips off workers, they would not be able to sue the employer afterward. That could incentivize companies to find fly-by-night annuity providers that give good deals to the companies for business, making their money by ripping off the firm’s workers before filing for bankruptcy.
The lack of a safe harbor has been the primary hurdle to getting annuities into 401(k) offerings, said J. Mark Iwry, former senior adviser at the Treasury Department during the Obama years. “It’s the single most frequently mentioned obstacle by plan sponsors,” said Iwry, who is now a nonresident senior fellow at the Brookings Institution.
“This bill is an open invitation to prey upon people who are exceedingly likely to lack meaningful access to a lawyer.”
Annuities come in many flavors and types; in general, they provide a stream of monthly payments to retirees after they pay into them. Any financial institution can sell an annuity, but the primary sellers are life insurance companies. Some annuities, like fixed-income products, are relatively tame, though they often have high fees for the insurers. Others are variable-income products with opaque terms that confuse buyers into purchasing them and don’t pay off as promised.
The annuities industry is a $235 billion-a-year business, with brokers enjoying kickbacks like resort vacations and luxury watches, according to a 2015 report from Sen. Elizabeth Warren, D-Mass. Insurance companies have longed to tap the trillions of dollars sitting in 401(k) plans for annuities.
That would include some of Neal’s biggest donors, including Prudential, whose political action committee delivered $5,000 to Neal last quarter. Or the American Council of Life Insurers PAC, another $5,000 donor, whose members also sell annuities. Or Mass Mutual Life Insurance Company. Or New York Life. Or Liberty Mutual. Or TIAA. Or the Insured Retirement Institute, an industry PAC. Or the Association for Advanced Life Underwriting PAC, another trade group that immediately praised the SECURE Act’s committee passage. The Investment Company Institute, a trade group for mutual funds (that also benefit from the SECURE Act), is another Neal donor.
All in all, Neal picked up $30,000 last quarter in donations from companies and trade groups with a direct interest in the SECURE Act.
Iwry, the former Treasury official, explained that “for some years, going back to at least 2012 or 2013, the insurance industry has proposed a very similar safe harbor.” At that time, Phyllis Borzi, a top official with the Department of Labor, denied the industry a regulatory safe harbor as part of new rules on 401(k)-style plans, deeming it too weak. So the industry decided to focus attention on Congress instead. Borzi and Iwry have expressed their concerns about it publicly.
In theory, giving workers the option to get a lifetime stream of income after they retire is a good thing. That’s what a defined benefit pension looks like, after all. The problem Iwry has with the safe harbor as written in the SECURE Act is more technical.
Section 204 states that the safe harbor applies as long as the insurance company is licensed by a state for seven years; it does not assess whether the company is financially secure or highly rated by credit rating agencies. “As currently drafted, the legislative safe harbor would cover even insurers that are rated below investment grade and that barely meet the pass-fail standards of the state insurance departments,” Iwry said. The bill also makes explicit that there is no requirement for the plan sponsor to select the lowest cost contract when selecting an annuity provider.
Second, insurance companies falling under the safe harbor umbrella could provide any type of annuity, both the fixed-income variety and the more predatory variable-income or indexed type, which have drawn consumer protection concerns about high fees and nontransparent costs. While variable-income and indexed annuities are not covered by the safe harbor, they’re mentioned as a type of annuity an insurance company protected by the safe harbor can provide. This language is confusing and could give leeway for insurance companies to sell products that aren’t suitable for workers.
Some experts look to 403(b) plans, which are retirement accounts for certain public school employees and tax-exempt organizations. Those plans allow annuities and have been criticized for letting in predatory actors. “The 403(b) market provides a living, breathing illustration of what it looks like when annuities are included in retirement plans without adequate fiduciary protections, and it is a hellscape,” said Barbara Roper, director of investor protection for the Consumer Federation of America.
The language in Section 204 is even internally contradictory. The title reads “Fiduciary Safe Harbor for Lifetime Income Provider,” but just a few lines under that, a sub-title reads “Safe Harbor for Annuity Selection.” This lack of clarity over what’s actually being covered could be exploited in litigation to give a much larger exemption than intended. And the insurance industry has no problem with such possibilities. “This may just be the result of sloppy drafting — a conflict between the text and the subhead — but it is too important an issue to be left ambiguous,” said Roper.
Other parts of the SECURE Act play into the annuity providers’ hands. For example, the bill increases how much workers can have automatically deducted from their paycheck to go into a retirement account, from 10 to 15 percent. This is great for annuity providers, who can get more retirement money on the back end for their products. Another section entitles workers to a benefit statement that estimates the lifetime income they would get from the current funds in their retirement account. This is almost an advertisement for annuities, allowing workers to compare what’s in their accounts to the promises the industry can make.
The sticking point for Democrats when it came to the SECURE Act was not the potential it holds to facilitate the defrauding of would-be retirees but, rather, a strange provision that Rep. Kevin Brady, the former Republican chair of the committee, insisted on, according to people involved in the talks. Brady wanted to allow 529 accounts, which are set up for education savings, to be able to pay for home schooling. It’s a head-scratcher of an idea and opposed by teacher unions. Brady reluctantly allowed it to be stripped out of the final package, even though it passed through committee.
But that has been the only real controversy over the bill, which passed both the House Ways and Means Committee and the Senate Finance Committee unanimously. The House set up the vote to come on the same week as the Consumers First Act, a bill from the House Financial Services Committee that would roll back all of Mick Mulvaney’s degradations of the Consumer Financial Protection Bureau. This placement would suggest that the House is putting together a “consumer protection”-themed week. But while the Consumers First Act fits that bill, the SECURE Act is not structured that way, and its Section 204 could actually hurt consumers while giving a powerful industry what it’s wanted for a long time.
Meanwhile, what’s not in the bill is just as telling. While in the minority, for a decade Neal called for retirement security reform to be based around the concept of an “automatic IRA,” and he introduced a bill to that effect each cycle. Under the legislation, if an employer with at least 10 workers declined to sponsor a workplace retirement plan, the workers would be automatically enrolled into an auto-IRA. The simplicity of the approach is strongly opposed by the industry, which profits by heaping complexity and fees onto workers.
That Neal was setting this up while resisting attempts to be more aggressive on oversight against the Trump administration has angered some critics. “He’s been overt about wanting to get stuff done,” said the Revolving Door Project’s Hauser. “He’s been so obviously bad at oversight that I don’t think he’s burned any bridges at the White House.”
The SECURE Act’s breezy journey to passage reflects the role of industry in the nation’s legislative process. After Newt Gingrich’s revolutionaries took over the House in 1994, he set about dismantling the chamber’s intellectual infrastructure, slashing the budget for staff and dissolving collective research assets. The point was not to save taxpayer money but to effectively privatize the lawmaking process. With just a handful of underpaid staffers, members of Congress outsource the crafting of legislation to lobbyists and corporate attorneys.
That’s not the only corruption at work in this process. Outside groups in Washington have also formed to help lawmakers navigate complicated issues like financial security in retirement, but other than foundation or labor funding, there’s no real path for them to remain solvent without relying on industry support. Take a paper from February of this year on portable, nonemployer retirement benefits, a collaboration between the Aspen Institute Financial Security Program and Common Wealth, two third-party outfits dedicated to the issue of retirement security. “This paper is made possible through funding from The Prudential Foundation, although the authors retained full editorial control,” the paper discloses.
Yet of the four people thanked in the acknowledgments, one is Jamie Kalamarides, who is president of Prudential Group Insurance. The authors even admit that the paper “draws on the insights” of Kalamarides and the others mentioned: “While this paper draws on the insights of all of the contributors listed above, the findings, interpretations, and conclusions expressed here, as well as any errors or other shortcomings, are those of the authors alone.”
The SECURE Act is hardly the kind of package that would ensure true dignity to seniors in retirement; a bill from Rep. John Larson, D-Conn., would, however, by doing something simple: expanding Social Security. “This is not going to increase the economic security of older Americans,” said Alex Lawson of Social Security Works, a big supporter of the Larson bill, which advocates are trying to get to a floor vote. “And there’s some potential to harm people with complex products that Wall Street makes bank on.”