Americans are working and living longer—and the SECURE Act reflects this new reality. First, it eliminates a maximum age for traditional IRA contributions, which is currently 70½. In addition, it alleviates pressure on older Americans by pushing the required minimum distribution (RMD) age for retirement accounts to 72 (up from 70½). More time for accumulation means more time to close the savings gap.
The legislation also reflects broader changes in worker behavior. Millions of Americans today rely on part-time jobs to supplement income. Good news for these workers, as the SECURE Act now enables long-term, part-time employees to participate in workplace retirement plans.
Other New Participant Benefits
Additional benefits of the legislation, namely tax reliefs and penalty-free withdrawals, will allow participants greater flexibility to cover upcoming life events.
- Participants in Qualified Defined Contribution, IRAs and 529 Savings Plans can recognize new penalty-free-in-service withdrawals.
- For Qualified Births and Adoptions, participants can take a distribution of up to $5,000 within the first year, and they are given longer time periods to repay such withdrawals. The one-year period starts on the date a child is born or legally adopted.
- Savers can withdraw up to $10,000 from 529 plan funds to help repay student loans, which can also be used for siblings. Funds can also be used to pay for certain costs of homeschooling and apprentice programs (e.g., fees, equipment, books and other supplies) for programs approved by with the Secretary of Labor.
Taken together, these simple provisions may help unburden both an aging and savings-anemic workforce.
Alongside the new legislation, retirement providers and advisors are creating new offerings and leveraging technology to help former participants in plans keep more of what they saved.
- Ensuring former participants receive their distributions. Many distributions often go ‘uncashed’ by former plan participants for various reasons. This creates an additional burden for the provider who has an ongoing fiduciary responsibility. Moreover, uncashed distributions could leave former participants short of their retirement goals.
- Increasing services available for former participants. Many plans now offer former employees (whether by force-out or rollover) access to the education, advice and institutional investment management that current employees benefit from, regardless of account size. This access helps participants continue to manage their savings commensurate with their retirement goals.
Very Small Businesses
The SECURE Act will have a meaningful impact on savings rates among employees of very small businesses, i.e., firms with fewer than 50 employees. Consider that while 90 percent of firms with 100+ employees have workplace retirement plans, only 45 percent of very small businesses offer one4.
Two key provisions will especially help to maximize small business participation. First, small businesses will enjoy up to 5,000 in annual tax credits ($15,000 maximum over three years) to help offset costs associated with establishing a defined contribution plan. For resource-starved small businesses, this tax credit could make a big difference.
In addition, the SECURE Act makes it easier for small businesses to participate in multiple employer plans (MEPs) with the elimination of the “one bad apple rule.” Another significant win for small businesses is the establishment of a new vehicle called “pooled employer plans” (PEPs); these allow unrelated businesses that meet certain requirements to band together to offer a 401(k plan). The purpose of both MEPs and PEPs is to lower overall plan administration costs and to provide individuals with access to better investment advisory services as well as tax breaks.
Holistic Financial Advisors
Because the SECURE Act will likely impact very small businesses more than others, financial advisors who serve these firms stand to benefit as well. Typically, smaller firms and startups require holistic financial planners who operate almost like benefits consultants. Among other things, these advisors help small businesses identify credit opportunities, plan for various stages of growth and establish retirement plans.
Expect these advisors to now help small businesses navigate the financial and logistical hurdles associated with MEPs and PEPs. Advisors can explain available options and help business owners choose the best plan for their employees.
The Insurance Industry
Most DC plans do not offer annuity options. Now, though, the SECURE Act creates a fiduciary ‘safe harbor’ for annuitized income strategies, significantly lowering the compliance burden. Plan sponsors are no longer required to conduct cost-benefit analyses and may select annuity options based on disclosures provided by insurance companies themselves.
These changes reduce risk, making it easier for employers to offer more options for employees transitioning from accumulation toward decumulation. Of course, that’s great news for employees, but it also creates enormous opportunity for insurance providers to simplify products and reach new markets.
We expect several new annuity options to enter the market, as insurance companies compete to grab a slice of the retirement pie.
What’s next for retirement?
For now, it’s too soon to predict long-term ramifications. But there’s no doubt the legislation benefits those throughout the retirement value chain. PEPs, MEPs and the Safe Harbor provisions will enable retirement providers to innovate in a way that helps millions of workers. Americans now have more opportunity to save longer. And small businesses will get the support they need to expand access.