SECURE Passed
But We’re Far From Done
By Neil Lloyd, Head of US Defined Contribution and Financial Wellness Research, Mercer
At long last, the Setting Every Community Up for Retirement Enhancement (SECURE) Act became law at the last gasp of the 2019 legislative session. SECURE clearly will shake up the retirement industry in myriad ways in 2020, but its longer-term impacts — particularly in structural areas around open multiple employer plans (open MEPs) and lifetime income solutions — could be even more significant and far-ranging.
SECURE has followed an amazing journey. It started with the 2016 initial introduction of the Retirement Enhancement and Security Act that ultimately coalesced into the SECURE Act. The industry was enthusiastic when SECURE almost unanimously waltzed through the House in May 2019 (417–3), but the legislation became stuck in the Senate. I was in Washington, DC, the week before the final signature and witnessed at close hand lobbying efforts to get SECURE past the finish line. Yet even Washington insiders reckoned the odds of getting SECURE into the $1.4 trillion spending package were no greater than 50%. Congratulations to all those who backed SECURE and Congress for passing the legislation, which will enhance many Americans’ retirement security.
What happens now?
This legislation has been touted as the most significant since the Pension Protection Act of 2006 (PPA). The PPA had a significant impact, being a key reason why at the end of 2019 we are expected to have roughly $2.5 trillion accumulated in target date funds (TDFs). At the end of 2018, TDFs held an estimated $2.1 trillion in assets.[1]
The SECURE Act has several key components that are especially important to retirement plan sponsors (most significantly DC plans), employees, and other industry participants — including the following:
- A new requirement that long-term part-time (as defined) employees be offered access to a DC plan where one is being offered to other employees;
- Safe-harbor auto-enrollment rules that encourage higher employee deferrals (relaxing the auto-enroll safe harbor cap from 10% of wages to 15%);
- Several other largely administrative provisions primarily focused on encouraging additional or at least retaining retirement savings;
- Reduced liability for sponsors who offer lifetime-income options in DC plans; and
- A provision that allows otherwise unrelated employers to join “open” defined contribution (DC) multiple-employer plans (“open MEPs”); and
- Long-awaited non-discrimination testing relief for closed DB plans.
Let’s consider the importance of these changes.
The long-term part-time employee provision requires employees be allowed to contribute to a DC plan, but the legislation does not require employers to match contributions. This requirement will likely have broad appeal to plan sponsors who have a growing number of long-term part-time employees, as these employees, although often predicted to become an essential feature of the “future of work,” often fall outside the eligibility criteria for traditional retirement plans.
Higher limits for safe harbor auto-enrollment will hopefully inspire higher auto-enrollment contributions; however, how many employers will move to the higher limits is unclear. Many industry experts believe a 10% auto-deferral rate is insufficient for most workers to secure their retirement, so we see higher safe-harbor limits encouraging higher savings rates.
Lifetime income is now firmly on the table
We covered the new lifetime income options in our April 2019 blog post, “Lifetime Income — What’s Next After Legislative Change?” The general points made in that article remain true:
“Although introducing the annuity safe harbor may remove one layer of deterrent, it will reveal additional issues with which plan sponsors must contend. For example, the legislative proposals cover portability to some degree, but significant roadblocks to portability remain. Other challenges, such as costs, complexity, transferability, recordkeeper integration, and sponsor staff time (most plan sponsor representatives have other jobs to do) remain, and these pediments will require discussion and action. With legislative change, at least those second level (or layer of) discussions can now start.”
Indeed, we have already seen that conversations with plan sponsors about lifetime income have increased and lifetime income issues are gaining further attention. While we may not have seen many cases of material changes to plans, such as offering deferred or immediate fixed or variable annuities, we are seeing more and more plan sponsors making incremental plan changes around this theme.
The passage of the SECURE Act will undoubtedly make discussing products like annuities with plan sponsors easier; no longer will these discussions “stop in their tracks” because there is no safe harbor. But beyond these provisions, the fact Congress has passed legislation focused on lifetime income being provided within DC plans, is an endorsement that retirees do need assistance and DC plans are in an ideal position to be able to help. There never has been a shortage of interest from plan sponsors around offering retirement income solutions to participants, but it has been difficult to move from interest to action.
Open MEPS could be transformational
According to the U.S. Bureau of Labor Statistics, 32% of all private-sector workers do not have access to retirement plans. Coverage is worse with employers who have fewer than 100 employees, where 47% lack access to retirement plans.[2] The general policy view is that open MEPs will improve retirement coverage by making retirement plans simpler, less costly, and more efficient to offer, especially for smaller employers.
We believe open MEPs could have a transformational effect on the industry. We not only expect them to be more cost-effective for many sponsors and participants than single plans, but also believe that some open MEP providers will begin to recognize incentives to innovate. For example, we expect open MEPs to proactively offer more retiree-focused solutions, because they will view asset retention after retirement as a priority. Such an offering may inspire corporate plan sponsors to also introduce retirement income solutions.
In 2020, we will still be looking for more detailed regulations and guidance for some key outstanding questions with regard to open MEPs that SECURE does not address, such as:
- Who can be an open MEP provider?
- How will conflicts be managed?
My DB colleagues in the United States tell me that the non-discrimination testing relief for closed DB plans likely will be a great help for pension-plan sponsors. This change, however, is unlikely to alter the general trajectory among employers away from DB and toward DC plans.
And what’s next on the legislative/public policy front? Will another 13 years go by before the next material piece of retirement legislation passes?
While changes arising from the SECURE Act will keep the industry busy, work will also begin in earnest on “SECURE 2.0.” Proposals from Senators Rob Portman and Ben Cardin (the Retirement Security and Savings Act) and Representative Richard Neal (Retirement Plan Simplification and Enhancement Act) will further enhance retirement (and financial) security for workers, including adjustments to Required Minimum Distribution (RMD) rules, student loan 401(k) matching programs, emergency savings features, and 403(b) plan investment into collective investment trusts (CITs). We probably have not seen the last iteration of Federal Auto-IRA and Auto-401(k) proposals. One issue to note is that “SECURE 2.0” may focus much more on overall financial security, not just retirement security — there is an increasing realization that a focus on retirement issues alone is insufficient.
In summary, SECURE’s passage likely will have immediate industry repercussions this year, but new structural changes, such as provisions for open MEPs and lifetime income solutions, could have a more profound and significant impact for decades. We should anticipate that the job of ensuring the financial security of all Americans is not and perhaps will never be complete. The PPA was a start, SECURE is a great move forward, but clearly more work is needed. Bring on “SECURE 2.0.”
[1] Source: Mercer Target Date Funds Highlights and Trends 2018 and 2019 Q1 Update
[2] U.S. Bureau of Labor Statistics, Employee Benefits Survey: Retirement Benefits, March 2018.
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