Michael Kreps of Groom Law: Cool Things You Might Not Know

Michael Kreps of Groom Law

One thing we love about our friend Michael Kreps is that despite his impressive bio and accomplishments as a principal at Groom Law Group and as senior pensions and employment counsel to the Senate HELP Committee, he is more spark than reserve – and he knows more about the industry than we are likely to forget in our lifetime. Today we talk about some hidden elements of proposed federal legislation that, if passed, could be industry-changing. And if you want to return more than $60 billion to retirement savers, what’s the one thing you could do? Read on to find out.

Michael Kreps, we are so excited to have you here with us today. Please share a bit about your role at Groom Law and your tenure in this industry.

Yes, thanks for having me. I'm a principal at Groom Law Group where I co-chair the retirement services practice group. We cover issues related to fiduciary duties and private transactions and all those fun things for employee benefit plans, both health and retirement. I started my career at Groom actually, and worked at Groom a number of years, and then went up and spent some time on the Hill as a senior pension counsel for the Senate Committee on Health, Education, Labor and Pensions. I was ERISA counsel for the Senate, and then came back in mid-2015 to work on fiduciary and other ERISA issues at Groom.

Impressive. So, there's a boatload going on in Washington, DC and around the country. What are you seeing that's interesting in the retirement security space?

Well, legislation continues to percolate. Retirement legislation is not a huge priority for Congress. There are a couple of members that care about it, that pushes things. But it's generally not a top tier issue for most members of Congress. Most care about health, infrastructure, foreign affairs and all kinds of other stuff. But still we do have a few members that are interested in it.

It just so happens that the Chairman of the Ways and Means Committee Richie Neal is particularly interested in it. It's an issue that he's been passionate about for a long time. So, we see a bi-partisan legislative path on a bill that is a grab bag of fix-it and clean up items for the retirement system. And then we also see a larger scale set of reforms in the Build Back Better Act, which is the partisan process.  The Build Back Better Act is where the people in Congress, at least on the democratic side who care about retirement, are focused. It’s a priority for them that we should have universal automatic enrollment.

As we read that draft legislation, it creates a national requirement for all employers with six or more employees to offer a retirement plan or enroll their workforce in some form of automatic savings. The non-ERISA solutions could include an enhanced version of payroll deduction IRA, essentially creating private sector momentum behind Auto IRA. Do you read it the same way?

This bill, or the current iteration of it and the idea universal automatic enrollment has been around for a while. I think we're getting close to 12 years since the introduction of the first auto IRA legislation at the federal level. And it's undergone a bunch of different changes over the years where it's drifted to the left and then drifted back to the center.

I would characterize the current version as the most industry friendly version of the legislation I’ve seen. It's basically just a requirement that employers offer a plan. There's no public option, like there have been in prior versions. In addition to imposing a requirement of the universal automatic enrollment on most employers, excluding all but the newest and smallest employers, it also then tries to make it easier on employers by providing a couple of different types of new plans employers can adopt that are pretty low cost, or don't have much burden on the employer. One is a 401(k) that doesn't require any matching contributions from the employer. It's a ‘deferral only’, we call it.

And then there's a payroll deduction IRA, which already exists. You could already do it, but they're making a new automatic enrollment payroll deduction IRA. I actually think that the most interesting part of this bill is maybe not the universal coverage piece, although that's important.

There is a requirement that going forward all plans that are intended to satisfy this coverage requirement include a lifetime income investment option. It doesn't get a ton of attention in the press. I think the automatic enrollment and universal coverage provision is the focus and that's the most important, but the lifetime income provision is interesting.

It would be the first time that a 401(k) would be required to have a lifetime income offering. There are some caveats: existing plans are grandfathered, and it only has to be offered for accounts over $200,000 in size. But, you know, that’s an interesting policy development.

Good highlight! We think the interesting part of that will be how it actually gets implemented.

For more than decade the industry has been trying to build lifetime income products with various clients, whether it's the straight single premium annuity -- where you give an insurer a hundred thousand dollars and they agree to pay you a hundred dollars a month for the rest of your life -- all the way to more creative things like guaranteed lifetime withdrawal benefits and QLACs, the panoply of different lifetime income options.

What's interesting is that the legislation is not picking and choosing. It's saying it doesn't really matter which one of those you pick, fiduciary, we're going to let you do your thing. You just have to have a distribution option that provides for some guaranteed lifetime income.

That piece would provide some wind beneath the wings for folks who've wanted to provide something but are operating in a market where it's not common practice yet.

That's right.

Doubling back for a second on automatic enrollment and coverage. For those in our audience that are focused on states, state programs are grandfathered in. Our interpretation is it's the programs that have already been legislatively enabled, but perhaps there's a broader interpretation.

Yes. I think there's been a lot of confusion around that. The version of the legislation that is moving through the House right now says you have to automatically enroll as a federal requirement. And then it says state programs that don't meet the minimum threshold of the federal government, we're just going to pretend like they do and grandfather them in.

I’ll give an example. Let's say the federal requirement is that if you're over five employees, you have to auto-enroll people. Kansas doesn’t have a program today but let’s say they have one that starts tomorrow that has a twenty-five person minimum for an entry point. In that case Kansas will just be deemed to be consistent with the federal mandate and will be grandfathered.

What the bill doesn't say is that states can't create programs going forward. In fact, they can. The bill offers a floor, not a ceiling. This is to the extent that the courts play out that these programs are not preempted by federal law, by ERISA; then it's a floor, not a ceiling. And that's consistent with the Democrats’ approach in many areas such as paid leave and more.

Got it. That's an interpretation we hadn't heard before, but we only hang around so many attorneys, so we are not surprised.

You should keep up that practice, it's probably good for your health.

Folks looking into their crystal balls have given the bill a 50/50 chance of passing. Do you have any different sense than that?

I’ll say 50/50 is pretty bold for any legislation. Note, it isn't even through the House yet, and the odds increase as it goes.

But you know, as much as people would like to see it pass -- there are a lot of supporters and it has a lot of merit, and it's further along today than it has ever been. This is the furthest it's ever got. And that was despite being in the State of the Union address at one point during the Obama administration. There's been a tremendous amount of progress in a decade to move this idea forward.

That said, I'm not overly optimistic that this provision makes it in there. Same for its sister provision, which is a refundable savers' credit, which could be just as impactful. I'm not all that confident that either will make it into a final bill. They could. It's just that in the grand scheme of things these retirement provisions are less important to members in Congress than just about anything else in the bill.

Let's talk just for a second about the SECURE Act of 2019. Among other things this Act enabled open MEPS and PEPs. January 2021 was the first time those programs could go live.

So I worked on the pooled employer plan provision for years and am pretty supportive of the idea. I think people are building those products and will continue to roll them out. A lot of us never saw PEPs as a coverage expansion tool, but rather a plan professionalization tool.

To put that another way that there was never an expectation, at least on my part and that of many other people, that there would be new employer entrants into the system because of the PEP; it was that the people that were coming in anyway would use a PEP that has professional management and more fiduciaries, rather than a single employer plan.

We’ve thought PEPs could provide simplification for employers who want to offer 401(k) plans.

I hear you. But the challenge with the simplification piece is you could do it anyway. The only thing a PEP really gets you is the ability to file a consolidated Form 5500. Everything else you could have done under prior law.

So other than marketing – yes there’s a marketing aspect to it – the creation of PEPs didn't give you very much in terms of legal changes. It did serve as a signaling mechanism from Congress to the industry to say, Hey, we're going to try this out. We're going to see how these pooled arrangements with more fiduciaries work. I think that was a noteworthy goal and it's one that is playing out now. We'll see where it lands. PEPs will be an important part of the marketplace for the foreseeable future. I think it remains to be seen how big of a player in the marketplace it will be.

Michael, you've been in the industry for a good while and seen an awful lot. If you could wave a magic wand, what's the one thing you would change that would make success easier and simpler in our industry?

I think the biggest problem we have in the retirement system isn't coverage actually: it's the diffuseness of the system. It's that we have opted for a trade-off in the US. We have said, we will have a very privatized system with no centralized administration, and we're going to give up those efficiencies. And in exchange, we're going to have a market-based system where everybody competes to build a better mousetrap and we'll gain those efficiencies. And the hope is that those private market efficiencies outweigh the inefficiencies created by decentralization.

But the thing that's interesting is that we lack the infrastructure to tie it all together. And that matters because when people change jobs, they leave accounts behind; they cash out. There are a number of estimates of the impact cash outs have on the system. Somewhere between $60 billion and $100 billion dollars a year leaves the system from job changers cashing out.

These are job changers with under $5,000 in their accounts, cashing out. It's a lot of money leaving the system. And in fact, if you plug that completely, you get more aggregate savings in the system than if you expand retirement plan coverage universally. The most interesting thing happening in my view is the effort to fix that by building an infrastructure that connects all the plans.

There's one company that's doing it. Full disclosure, they're a client, but they're doing a really cool thing. The recognition that cash outs are a problem and the recognition by a couple major recordkeepers now that it's a problem, and the expansion of efforts to try to plug that gap, I think is the most important thing that is happening right now.

We like automation – you’re describing automated portability for 401(k) accounts.

Yes. That's what they're doing. In today’s system, your account under $5,000 can be involuntarily distributed from a retirement plan when you leave an employer. And if your account is under $1,000 the plan will send you a check, which it turns out, people just cash and they pay the penalties and taxes. If the plan doesn’t send you a check, your balance can be rolled over to a Safe Harbor IRA, which people sometimes find, and sometimes don't.

An auto portability solution would basically say, let's just have that money follow you from plan A to your new plan B. The infrastructure you have to build has applications that are great for that, but are also great for just finding people and reconnecting them to their savings.

You may have accounts you forgot. The Department of Labor has been beating up on employers for several years now to go find those people. It's really hard. It's very labor intensive. I think the auto portability infrastructure will fix a lot of that. It provides a centralized framework for our private sector system that’s been lacking for 40 or 50 years.

One of the things we love about this space is the amount of innovation and creativity people bring to their work every day – leading to the amount of positive forward change we see. Our final question is always a fun one. What are you planning to be for Halloween, Michael?

I have to take a trip this Halloween, so I'm not going to actually get to dress up. Normally I would be a pirate. I've been a pirate now for 20 years. It's fun and I dress my dog up too. She would have a pirate costume as well.

We might need a photo of that.

It's pretty ridiculous.

Michael – what a terrific conversation. Thank you for sharing your expertise with us! Want more? You can connect directly with Michael Kreps by email here. You can follow Michael’s work at Groom Law Group here. You can also connect with Michael on social here.

This piece was featured in the October 21, 2021 edition of Retirement Security Matters. For more fresh thinking on retirement savings innovation, check out the newsletter here.