The Setting Every Community Up for Retirement Enhancement Act (SECURE Act) is arguably the most significant piece of retirement legislation since the Pension Protection Act of 2006.
Here are a few key areas impacting defined contribution (DC) plans and highlights of what you should consider before adopting any individual provisions of the Act. I acknowledge that finding themes in legislation is akin to identifying images in a Jackson Pollock drip painting: It requires a bit of imagination! But if you look closely, the changes can be grouped into a few categories.
Generating lifetime income from DC plan balances
The Act addresses one of the longstanding impediments to adopting lifetime income options in DC plans, by creating a fiduciary safe harbor for selecting an annuity provider. The Act also eases portability of any existing annuity contracts when a plan discontinues its lifetime income investment options.
Sponsor considerations: Most sponsors would agree that ensuring an adequate stream of lifetime income is a worthy goal. But few have been interested in being a first mover for their own plans, particularly given limited participant interest. So perhaps you should use this opportunity to consider the following question to help guide next steps:
- As plan fiduciaries, is it your goal to offer lifetime income options, or would you rather participants manage their own financial lives?
- Can you boost the number of participants who have access to lifetime income payments by providing more educational tools that discuss other non-annuity options such as systemic withdrawals, 3rd party annuity marketplaces, etc.? What extra value would an in-plan annuity provide?
- Would it be better to start educating participants about annuities to spark interest, rather than adding an annuity feature first and hoping participants adopt it?
- If you add an annuity feature to your plan, what strategies should be in place to increase participant interest? Should payouts default to annuities with an opt-out feature instead?
Pre-retirement access to balances: Is your DC plan a retirement vehicle or income support program?
While politicians claim to support retirement income security, they also like using the tax code to further “worthy” social needs — including easing financial stresses for working Americans. There are a number of provisions in the Act that make it easier to get pre-retirement access to plan balances to pay expenses related to adopting a child or damage inflicted by a presidentially declared disaster.
Sponsor considerations: It’s hard to tell participants in need they can’t have access to these funds, especially when Congress allows it. At the same time, if you’re concerned about ensuring adequate retirement income, why allow even more pre-retirement access? Perhaps you need an overall framework first to decide whether your DC plan is mainly an income support program that should enable participant access wherever possible. In that case, it seems increased in-service access would be logical. But if it’s a retirement program, how much access is too much? Should there be some lifetime limits — stricter than the law envisions — on in-service withdrawals? Establishing such a framework now is a logical first step in deciding how to address this rather than deciding each change on an ad-hoc basis.
Expanding retirement plan access for part-time workers in 401(k) plans
One of the major shortfalls of the U.S. retirement system is the lack of access to employer plans for part-time workers. Under the new Act, 401(k) plans can no longer exclude long-term, part-time employees from participation provided they work at least 500 hours in each of three consecutive years and have reached age 21. However, Congress did not mandate that employers provide these workers with employer contributions or count them for purposes of nondiscrimination testing.
Sponsor considerations: Now is a good time to consider more broadly which retirement plan benefits you’ll provide to long-term part-timers. This is particularly true if you’re planning to shift more of your workforce to a part-time basis. Is an “hours” requirement even needed before allowing part-timers to participate? Does auto-enrollment make sense for this group? How much of the cost of employer contributions could be offset by recapturing non-vested amounts?
Navigating between different tax preferred savings vehicles
The law expands the use of Section 529 plan balances for paying down student loan debt. It also permits ADP/ACP safe harbor plans that use automatic escalation to raise their cap after the first year of participation from 10% to 15% of compensation.
Sponsor considerations: These two provisions may seem unrelated. But larger issues arise from the many different tax-preferred savings programs: The average participant has no idea how to choose among them. And so, while raising the cap on auto-escalation in safe harbor plans from 10% to 15% is a positive, it also sends a message to participants that this is the preferred way to save without explaining the alternatives. So, you may want to consider how you can help participants maximize what is available rather than expecting them to navigate all the options for tax-advantaged savings themselves.
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The Pollock approach – not random after all
Looking at each individual provision of the Act in isolation may seem like the Pollock approach — throwing paint against a canvas as though at random. But Pollock had a careful plan for the overall work starting with preparing the canvas before beginning. To us, that’s a useful way to think about this legislation: Ask yourself deep questions, envision the framework for your plan, create goals for the benefits offered, and only then decide whether these new options can help members maximize their participation in your plans.
You’ll no doubt be flooded with invitations to webinars and presentations (including from Buck!) explaining the provisions of the law over the next several months. We respectfully invite you to ours, where we’ll be exploring the Act and offering additional insight:
Want to learn more about the SECURE Act and the implications for your plan? Watch our on-demand webinar.
