Securing retirement: key things to know about the SECURE Act
Late December 2019, while many were winding down the year and enjoying holiday festivities, the federal government passed a new law aimed at improving retirement security for millions of Americans. The SECURE Act, short for Setting Every Community Up for Retirement Enhancement Act, is the first major piece of retirement legislation passed since the Pension Protection Act of 2006 (PPA).
Like the SECURE Act, the PPA was designed to improve retirement security. It transformed the way Americans save for retirement by allowing automatic enrollment features, raising contribution limits and permitting the use of retirement-focused default investments such as target date funds, to name a few. But there was still work to be done: Coverage gaps left pools of workers without access to a plan, strategies for converting savings into lifetime income were lacking, and increased lifespans meant that the age for required distributions became outdated. The SECURE Act addresses these issues and more, representing a significant step toward modernizing the American retirement system.
The SECURE Act comprises 30 provisions, falling into three broad categories:
- Increasing access to retirement plans
- Enhancing savings rates
- Increasing access to lifetime income
While there is much to unpack within the new legislation, let’s dive into some of the provisions in each category that directly affect plan sponsors.
1. Increasing access to plans
Access to a plan through an employer has been shown to boost savings. According to AARP, workers are 15 times more likely to save if they have access to a retirement savings plan at their job. The SECURE Act encourages employers to implement retirement plans for their employees and broadens access to existing plans. Specifically, the SECURE Act:
Permits unaffiliated employers to adopt a single multiple employer plan (MEP). Prior to the SECURE Act, MEPs were available only to employers that belonged to a “bonafide group or association.” Often referred to as a “closed MEP,” participating employers were required to share a common interest, such as belonging to the same trade association or professional employee organization. The SECURE Act removes this condition, often referred to as the “commonality” requirement, and permits small, unaffiliated employers to adopt “open” MEPs. While this provision only applies to 401(k) plans, it is expected that Congress will broaden its scope to include 403(b) plans as well.
Eliminates the “one bad apple” rule, which says that if one employer participating in an MEP violates the applicable rules it could trigger liability for all participating employers. This change is effective for plan years beginning after 31 Dec 2020.
Increases tax credits for small employers. Effective 1 Jan 2020, small employers that adopt a new retirement plan will receive a start-up credit of up to $5,000, up from $500. In addition, employers that add automatic enrollment to their plan will receive a $500 tax credit per year for up to three years.
Expands eligibility for long-term, part-time employees. Presently, employers may require employees to work at least 1,000 hours in an uninterrupted 12-month period to participate in its retirement plan. Beginning in 2021, employers must allow plan access to long-term, part-time employees with least 500 hours in three consecutive 12-month periods.
2. Enhancing savings rates
PPA provided many provisions to help people save for retirement. Now, 13 years later, the SECURE Act modifies those rules to further improve savings rates. A few key examples include:
Raising the cap on automatic enrollment contributions for safe harbor plans. Previously, safe harbor plans with a qualified automatic contribution arrangement (QACA) could not automatically increase an employee’s contribution above 10% of their paycheck. Effective 1 Jan 2020, the cap increased to 15%, with the option for the employee to opt out. This increase may improve retirement savings for those who aren’t actively engaged in their plans.
Extending the age for required minimum distributions (RMDs). Under previous law, participants were required to take distributions beginning at age 70½. Effective 1 Jan 2020, the required age for age RMDs increases to 72, giving participants more time for their money to potentially grow before withdrawing it. Furthermore, individuals working beyond age 72 are still permitted to delay taking RMDs from most retirement plans until after they retire.
Eliminating the maximum age for IRA contributions. Previously, this age limit was 70½ years. As people live and work longer, repealing the age limit allows people who are still working to continue contributing to their IRAs.
3. Increasing access to lifetime income
For years, the retirement conversation focused on the accumulation phase by urging workers to invest assets to build a nest egg. After retirement, people transition into the decumulation phase as they convert that nest egg into lifetime income. A holistic retirement plan should include retirement income, and the SECURE Act paves the way for that to happen by:
Making it easier to include annuities in retirement plans. Effective upon enactment, the SECURE Act created a new fiduciary safe harbor that helps 401(k) plans offer annuities by protecting plan sponsors from liability should the annuity provider become insolvent or otherwise unable to pay. This is a major step forward at a time when market investments alone are proving to be inadequate for many retirees. Other than pensions and Social Security, only annuities can guarantee lifetime income. As life expectancy increases and healthcare costs continue to rise, annuities have become an important way for people to literally “insure” they won’t run out of money in retirement.
Requiring lifetime income disclosures on statements. A final effective date awaits guidance from the Department of Labor (DOL), but plan sponsors will ultimately be required to show employees how their retirement account balances translate into guaranteed monthly income. This is important because participants may think they’ve saved enough, but when those savings are converted into a monthly income stream, they may realize it is not enough to cover their expenses.
Increasing portability of lifetime income balances. Previous legislation dictated that annuities must be liquidated when participants leave the plan or if the sponsor no longer offers it. Why is portability so important? Consider that individuals born from 1957 to 1964 held an average of 12.3 jobs during their lifetime. And millennials have earned the nickname the “job-hopping” generation with good reason: According to a Gallup report, 21% of millennials say they have changed jobs within the past year, which is more than triple the number of nonmillennials who report the same. Because of the frequency of job changes, it’s more important than ever for workers to have the ability to easily move retirement savings so they don’t leave money on the table, especially if these investments contain a lifetime-income option. Effective 1 Jan 2020, participants can roll over a lifetime income investment to another employer-sponsored retirement plan or IRA without penalty or fees.
Action steps for plan sponsors to modernize their plans
The SECURE Act contains many significant changes that should improve retirement savings for millions of American workers and retirees. While many provisions are already in effect, further guidance is needed on others. In the meantime, plan sponsors should educate themselves about the SECURE Act provisions and assess their impact on their plans.