The Secure Act Affects Your Retirement Plans. Here Are 7 Key Implications for Employers.
Many in the retirement community, including us at Russell Investments, are celebrating the passage of the SECURE Act, marking the biggest step in the last decade toward improving the future of retirement security for Americans. Plan sponsors and their providers will need to understand the effects of the new law on their plans, because the act contains provisions that will lead many organizations to amend their plan documents and disclosures and potentially their plan design.
We have prepared a summary of the key provisions of the act, particularly those related to employers and retirement plan sponsors.
DC annuity safe harbor
As a general matter, many DC plan sponsors have been reluctant to add an in-plan annuity option because of possible fiduciary liability—perhaps years after the selection of the annuity carrier—based on a claim that the fiduciary should have known that the carrier was not “financially capable of satisfying its obligations.”
SECURE addresses this issue by deferring to state insurance regulation on the issue of the financial condition of the annuity carrier. Under SECURE, a fiduciary would be deemed to satisfy the “financially capable” requirement if it obtains certain representations from the insurer—for example, that it is appropriately licensed and has complied with certain state regulatory requirements. The insurer must notify the fiduciary of any relevant change in circumstance, and the fiduciary cannot be aware of other facts that would cause it to question the insurer representations.
The act also facilitates the portability of lifetime income products held in retirement plans. It allows plan participants to move these types of products if the lifetime income investment in their current plan is no longer offered, and allows for the distribution of a lifetime income investment if the distribution is made via a direct rollover to another retirement plan or IRA.
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Potential impact to plan sponsors:
The sole focus for DC plans has historically been on accumulating assets, with little thought to helping participants manage spending in retirement. The act may prompt more defined contribution plans to include in-plan annuities in their plan design. The task of evaluating and monitoring guaranteed retirement income options will be greatly simplified for fiduciaries because they will now be able to rely on the state insurance regulator to evaluate the insurer.
Mandatory lifetime income disclosure
SECURE requires DC plan administrators to annually provide participants a description of the monthly “income stream” they would receive if their account balance were paid in the form of a single life annuity and joint and surviving spouse annuity, based on assumptions specified in DOL guidance. DOL is instructed to issue model disclosures.
SECURE provides that plan fiduciaries shall not be liable “solely by reason of the provision of lifetime income stream equivalents” derived from DOL prescribed assumptions and rules.
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Potential impact to plan sponsors:
A new participant reporting requirement for plan sponsors is a lifetime income statement (generally supplied by the plan administrator) at least once during any 12-month period using DOL-supplied assumptions for the projections. The new disclosure should assist employees in understanding their retirement readiness and determining an adequate savings rate.
Coverage of long-term part-time employees
SECURE generally requires sponsors of 401(k) plans to cover employees working more than 500 but less than 1,000 hours per year for three consecutive years. Internal Revenue Code nondiscrimination and top-heavy rules would, however, generally not apply to these employees, and the rule would generally not cover collectively bargained employees.
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Potential impact to plan sponsors:
Employers which have historically excluded long-term part-time employees from participation in the employer-sponsored plan may see an increase in company contribution expense if they choose to provide matching or non-elective contributions to these employees (not required).
Authorization of Open Multiple Employer Plans (Open MEPs)
By way of background, a MEP is a multiple employer plan, defined as a plan for employees of unrelated employers. An Open MEP is a provider-based multiple employer plan in which the participating employers do not have any special relationship with each other or with the provider.
Open MEPs were effectively prohibited under a current DOL rule that required employers participating in a MEP to have a “commonality of interest” (and meet certain other requirements) and generally prohibited financial services firms, record keepers, and third-party administrators from operating MEPs. SECURE allows for defined contribution plan Open MEPs (referred to as Pooled Employer Plans) that meet certain requirements and that are provided by a Pooled Plan Provider.
The MEP must, among other things, state that each participating employer retains fiduciary responsibility for the selection and monitoring of the Pooled Plan Provider and the investment and management of that employer’s share of the plan’s assets (to the extent not otherwise delegated to another fiduciary by the Pooled Plan Provider and subject to ERISA section 404©). In addition, effective 2021, the act eliminates the “one bad apple” rule that penalized the entire MEP for the violation of qualification rules by a single employer.
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Potential impact to plan sponsors:
Open MEPs should increase retirement plan coverage and have the potential to lower the cost of retirement access to a large number of individuals, particularly among small employers. Organizations that currently offer an employer-sponsored defined contribution plan may opt to provide retirement benefits through a Pooled Plan Provider.
Increase the safe harbor auto-escalation cap
Under the current automatic escalation 401(k) nondiscrimination testing safe harbor, escalation is capped at 10% of pay. SECURE increases this cap to 15%.
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Potential impact to plan sponsors:
Participant savings rates will get a boost from the higher escalation cap in plans that make use of the safe harbor. Non-safe harbor plans may also feel more comfortable increasing their escalation caps, as some plans have historically, although unnecessarily, viewed the safe harbor plan design as implied advice from the DOL.
Increase the Required Minimum Distribution age from 70½ to 72
Internal Revenue Code section 401(a)(9) generally requires that distributions under a qualified plan begin as of the later of age 70 1/2 or when a participant retires. SECURE increases the Code’s “required beginning date” to age 72, effective in 2020.
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Potential impact to plan sponsors:
Because greater numbers of participants are remaining invested in their employers’ plans after retirement, this provision should have the net effect of increasing plan assets as fewer assets will flow out due to required minimum distributions. This change may cause some short-term complications. For example, an individual that turned 70 ½ in 2019 will need to take their required minimum distributions in 2019 and 2020, even though they won’t reach age 72 until 2021.
Closed group nondiscrimination relief
Closed groups refers to a limited group of participants who get grandfathered benefits under a DB plan or make-up benefits under a DC plan. They have historically presented several problems under Internal Revenue Code nondiscrimination rules because while a closed group may be nondiscriminatory when it is closed—as some participants remaining in the group are promoted and get pay increases, and younger, lower-paid, non-closed group members join the plan—the closed group may, over time, become discriminatory.
To address this issue, SECURE provides that DB plans may be aggregated with DC plans and tested on a benefit accruals basis, without having to satisfy burdensome requirements (sometimes referred to as gateways) if certain conditions are met. Similar relief is provided for closed groups receiving make-up benefits in DC plans.
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Potential impact to plan sponsors:
This non-discrimination testing relief will permit higher salary employees in closed groups to save at higher levels and greatly simplifies the exercise of discrimination testing for plan sponsors with closed groups.
The bottom line
In closing, we regard the SECURE Act as a significant improvement in current retirement plan policy. That said, it’s a comprehensive legislative package that has significant plan design and plan administration and compliance implications for both providers and employers. We expect ongoing regulatory work in connection with the new legislation, and we look forward to continuing to guide you through the implications of the SECURE Act as it continues to develop.
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