For the first time since the passage of the Pension Protection Act (PPA) in 2006, Congress forwarded and the president signed a major piece of retirement legislation. Referred to as the Setting Every Community up for Retirement Enhancement Act (SECURE Act), the law includes a number of provisions that will undoubtedly change the retirement landscape.
Although it is early and specific details are scant, we thought we would take the opportunity to comment on a few items that could make the most impact on plans.
How the SECURE Act affects…
1. Eligibility for 401K Plans
In an effort to make 401(k) plans even more accessible to part-time employees, those employees who are at least age 21 and have worked at least 500 hours per year for a minimum of three consecutive years would be guaranteed eligibility. While we applaud the loosening of entry requirements, we await further clarification for plan sponsors who employ seasonal employees. Absent from any preliminary commentary are specifics as to whether this additional group of employees would count towards audit requirements, causing additional administrative costs and obligations. Current eligibility rules require all employees that work at least 1000 hours per year to be allowed entry to a plan.
2. Annuity Information and Options Expanded
To give perspective on the amount a person needs to save for retirement, the SECURE Act would require plan participants to be provided, at least annually, a “lifetime income disclosure”. The goal of the disclosure would be to convert lump sum savings into a projected lifetime income stream in retirement. Most plan participants were already introduced to this concept from Third Party Administrators in the form of information provided on websites and quarterly statements. We support the effort to better educate employees.
Also included is a fiduciary safe harbor provision that would make it easier for plan sponsors to offer lifetime income options with annuities accessible via the plan. Many may remember when annuities were a common distribution choice in a qualified retirement plan. However, responsibility on the part of the plan sponsor for vetting the annuity provider caused this option to fall out of favor. Protection for the sponsor may now result in this option reappearing in plans. Our suggestion would be to retain an annuity election as a choice outside the plan rather than as a “suggested” or “endorsed” payment option.
3. Auto-Enrollment 401(k) Plans Enhanced
For plans currently utilizing automatic enrollment and automatic deferral escalation, the maximum deferral rate is limited to 10%. The SECURE Act allows the cap to be increased to 15%. For plans with little to no advisor interaction or plans with immediate deferral eligibility, this can lead to much more meaningful savings rates over time.
4. Help for Small Businesses Offering Retirement Plans
The SECURE Act is reflective, in part, of the federal government’s desire to encourage small businesses to start retirement plans. With this in mind, the Act expands the current tax credit from 50% of a small business’ retirement plan costs, maximum of $500, to the lesser of $5,000 or $250 multiplied by the number of non-highly compensated employees. Additionally, a new tax credit of $500 is available for small employers who adopt auto-enrollment.
5. Multiple-Employer Plans
In an effort to encourage plan implementation through possible reduced fees, the SECUREAct allows for the establishment of “open multiple-employer plans” (“open MEPs”). While MEPs are currently allowed by law, they were previously limited by a requirement that all participating employers must have some common interest (i.e. trade associations). The Act now permits unrelated employers to participate in a multiple-employer plan subject to a number of other requirements. It’s important to note that a plan sponsor retains the same responsibility, though they may be one of many utilizing a single plan. SYM has reviewed and will continue to further research these changes as more information and details are provided.
6. Required Minimum Distributions
The law also delays Required Minimum Distributions from age 70 ½ to age 72. As more people are working longer, it seems only right for them to be able to benefit from positive tax advantages for longer as well.
We will continue to provide updates as more details emerge regarding execution and timing. As always, if you would like to discuss any of these topics, please contact your SYM advisor.