Current Thinking

The Retirement Savings Modernization Act

Legislation has been introduced to bolster American’s retirement savings by Senators Tim Scott, and Pat Toomey and Representative Peter Meijer.  The Retirement Savings Modernization Act is purported to level the playing field for 401(k) plan savers.  The proposed legislation would allow workers to diversify assets included in defined contribution plans, such as 401(k) plans and amend ERISA (“Employee Retirement Income Security Act of 1974”) to clarify that private sector retirement plan sponsors may offer plans, including both pensions plans and 401(k) plans, that are prudently diversified across the full range of asset classes.

Since 1982, pension plans have incorporated exposure to asset classes outside of the public markets, such as private equity and real estate. Even though they are covered by the same law, 401(k) plans almost never incorporate exposure to alternative assets due to fiduciaries’ anticipated litigation risk.

According to the legislators, inflation has eroded and devalued the savings many Americans spent their lives accumulating.  The bill would modernize retirement plans to ensure they can provide diverse investments with higher returns. They state that American workers and their families deserve to go about their lives with peace of mind, knowing their hard-earned money will be secure when they choose to retire. 

“With inflation at record highs, a stock market downturn, and a potential recession on the horizon, many Americans are rightfully concerned about their financial future,” said Sen. Toomey. This legislation would provide the millions of American savers invested in defined contribution plans with the option to enhance their retirement savings through access to the same wide range of alternative assets currently available to plan sponsors and participants in defined benefit pension plans. The bill would open the door to higher returns and a more secure retirement for millions of Americans.

Representative Meijer said “Americans deserve flexibility with their retirement options, especially in times of fiscal uncertainty,” Furthermore, “It is past due for retirement plans to reflect the demands of the modern workforce, and the Retirement Savings Modernization Act takes a necessary step towards that. With this bill, Americans can better prepare for retirement, and I am proud to join my colleagues in the both the House and Senate in introducing this meaningful legislation.”

Until the 1970s, most Americans working in the private sector relied on pension plans for retirement. Today, the vast majority of private sector workers rely on 401(k) plans. However, pension plans have consistently outperformed 401(k) plans because they diversify across the full range of asset classes, putting one of every five dollars in alternative asset classes like private equity. A recent Georgetown study estimated that 401(k) plans diversified with a modest allocation to alternative asset classes including private equity, hedge funds, and real estate, would increase American workers’ retirement savings by 17% per year and reduce losses in a downturn.

The amendment to ERISA would clarify that plan fiduciaries may select investment options that include a range of asset classes, including private equity. Nothing in ERISA currently limits the asset classes that may be included in a plan.  However, the amendment to ERISA would make it clear that Congress intends to let investment professionals determine the appropriate range of asset classes.  

The bill also provides the protection of ERISA’s fiduciary standard. A unanimous U.S. Supreme Court has affirmed that ERISA’s fiduciary duties are “the highest known to the law.” [Fiduciaries must still select investments through a prudent process, and the bill does not explicitly create a safe harbor from a fiduciary’s legal duties.]  In addition, the bill promotes prudent diversification of retirement savings plans. The bill does not require that plan participants have access to specific asset classes, but it provides fiduciaries with the tools to better ensure diversification.  The bill specifically states that a fiduciary shall not be liable for a breach of fiduciary duties for recommending, selecting, or monitoring any “covered investment” as an investment option for a plan, or causing the plan to make any payment or incur any expense, associated with such covered investment. [The bill also states that nothing in the bill would be construed as providing an exemption or safe harbor from the requirements of the diligence and oversight required by the plan’s fiduciary.]

Under the bill, covered investments would include any direct or indirect investment, and includes, but is not limited to, any of the following:

  1. Commodities
  2. Debt, including public and private credit
  3. Digital assets
  4. Hedge funds
  5. Infrastructure
  6. Insured products and annuities
  7. Private equity
  8. Real assets
  9. Real estate or real estate-related securities
  10. Securities that are listed on a national securities exchange
  11. Venture capital
  12. An investment in any fund, commingled account, or pooled investment vehicle that invests in any investment, including but not limited to an investment described in items 1-11, above

For full text of the bill click here.

The bill is supported by a number of industry groups.  However, there is some opposition to the bill from other legislators and the American Retirement Association.  The Department of Labor (DOL) previously cautioned against the use of investments in crypto currency back in March 2022.  The DOL warned that fiduciaries should “exercise extreme care before they consider adding a cryptocurrency option to a 401(k) plan’s investment menu for plan participants.” The DOL said that cryptocurrencies are unusually “speculative and volatile” and are more vulnerable to hacking.

The sponsors of the bill are seeking to include this retirement legislation in a potential year-end tax package.  If lawmakers are able to negotiate a package in the lame-duck session after the midterm elections, it would likely also carry a broader, bipartisan package meant to boost retirement savings that would be based on similar House and Senate bills. Proponents are also hoping to add a Democrat as a co-sponsor of the legislation. Bipartisan support would boost its chances for a year-end tax bill, which will need support on both sides of the aisle to pass.

While ERISA does not currently preclude investment in the alternative asset classes listed above, the bill would clarify that fiduciaries managing defined contribution plans are permitted to invest across all asset classes, and do not have to limit themselves to stocks and bonds. The sponsors of the bill are concerned that defined contribution plan fiduciaries are often too cautious to invest in alternative assets when managing defined contribution plans for fear of being subject to ERISA-related litigation for investing imprudently. The intent of the bill is to clarify the law for fiduciaries who may be unaware that they can invest in alternative asset classes, or fear being sued solely on that basis. The bill emphasizes that alternative asset classes are not exempt from ERISA’s fiduciary duties of loyalty and prudence, and these asset classes if chosen still have to be chosen through a prudent process.

From our standpoint, the good news is that the bill and amendment to ERISA would open up additional investment alternatives that can be utilized with appropriate fiduciary oversight to enhance the investment alternatives available to 401(k) plan participants.  Furthermore, clarification of ERISA with respect to alternative investments is good for plan sponsors and plan participants because this could provide greater flexibility to participants in seeking to meet their retirement savings goals. 

About the Author

Richard Rausser

Richard W. Rausser has more than 30 years of experience in the retirement benefits industry. He is Senior Vice President of Thought Leadership at Pentegra, a leading provider of retirement plan and fiduciary outsourcing to organizations nationwide. Rich is responsible for helping to shape and define Pentegra’s viewpoint on workplace retirement plans, plan design strategy, retirement success and employee savings trends. His work is used by employers, employees, advisors, policymakers and the media to produce successful outcomes for American workers.  In addition, Rich is responsible for Pentegra’s Defined Benefit line of business, which includes a team of Actuaries and other retirement plan professionals as well as Pentegra’s BOLI line of business.  He is a frequent speaker on retirement benefit topics; a Certified Pension Consultant (CPC); a Qualified Pension Administrator (QPA); a Qualified 401(k) Administrator (QKA); and a member of the American Society of Pension Professionals and Actuaries (ASPPA). He holds an M.B.A. in Finance from Fairleigh Dickinson University and a B.A. in Economics and Business Administration from Ursinus College.