September 29, 2022

Toomey, Scott, Meijer Introduce Legislation to Bolster Americans’ Retirement Savings

Retirement Savings Modernization Act Will Level the Playing Field for 401(k) Plan Savers

Washington, D.C. U.S. Senators Pat Toomey (R-Pa.) and Tim Scott (R-S.C.) and U.S. Representatives Peter Meijer (MI-03) today introduced the Retirement Savings Modernization Act to bolster Americans’ retirement savings by allowing workers to diversify assets included in defined contribution plans, such as 401(k) plans. This legislation will amend the Employee Retirement Income Security Act of 1974 (ERISA) to clarify that private sector retirement plan sponsors may offer plans, including both pensions and 401(k)s, 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. 

“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. “Our legislation will 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 savers with defined benefit pension plans. This reform will open the door to higher returns and a more secure retirement for millions of Americans.”

“Inflation has eroded and devalued the savings many Americans spent their lives accumulating,” said Sen. Scott. “This bill would modernize retirement plans to ensure they can provide diverse investments with higher returns. 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.”

“Americans deserve flexibility with their retirement options, especially in times of fiscal uncertainty,” said Rep. Meijer. “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.”

The Retirement Savings Modernization Act has broad industry support, including from the Securities Industry and Financial Markets Association (SIFMA), the Defined Contribution Alternatives Association (DCALTA), the Institute for Portfolio Alternatives (IPA), the Small Business Investor Alliance (SBIA), the American Securities Association (ASA), and the Chartered Financial Analyst (CFA) Institute.

Until the 1970s, most Americans working in the private sector relied on pension plans for retirement. Today, however, the vast majority of private sector workers rely on 401(k) plans. In 2019, 85.5 million Americans participated in defined contribution plans such as 401(k) plans, while only 12.6 million Americans participated in private pension 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—private equity, hedge funds, and real estate—would increase American workers’ retirement savings by 17% per year and reduce losses in a downturn.

The Retirement Savings Modernization Act will level the playing field for 401(k) plan savers by unlocking access to the diversified exposure that has benefited pension plan participants for four decades. 

More specifically, the Retirement Savings Modernization Act will:

1.     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; this amendment makes clear that Congress intends to let investment professionals determine the appropriate range of asset classes.

2.     Protect 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 explicitly does not create a safe harbor from a fiduciary’s legal duties.

3.     Promote the 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.

To read the full text of the bill, click here.