Have you ever spotted a dog chasing a car down the street and wondered, “just what would he do if he caught it?”
With the passage of the SECURE Act (Setting Every Community Up for Retirement Enhancement), a package of retirement plan reforms years in the making, the retirement plan industry has finally caught the car and is quickly figuring out what to do about it. Financial advisors who support retirement plans are scurrying to get up to speed and make the most of new opportunities.
SECURE offers a virtual cornucopia of possibilities both now and a bit down the road. The Act is intended to make it easier for small-business owners to offer retirement plans to their employees, expanding long-term financial security for millions of workers.
The legal and regulatory framework is now in place to help small businesses:
- Band together to offer retirement plans
- Increase lifetime income offerings
- Use enrollment and tax changes to boost worker savings
It’s worth noting that the changes wrought be SECURE can be divided into two categories: opportunities that advisors and employers can take advantage of immediately and opportunities that will become increasingly available over the next several months.
What to Tackle Today
Let’s first look at what financial advisors can tackle immediately.
Anchoring in Safe Harbors – SECURE is promoting greater retirement savings by increasing protections for employers that sponsor retirement plans, including enhanced regulatory safe harbors.
The Act potentially provides a significant benefit for participants who have been automatically enrolled. Once a participant is automatically enrolled, the plan can increase that participant’s deferral rate each year until the participant is deferring 15% of their pay. This can be done without invalidating a Safe Harbor design. This change should bolster the retirement security of a large swath of plan participants. One constraint: the plan can’t require a first-year deferral rate of greater than 10%.
Additionally, the Act removes the requirement to provide advance notice for Safe Harbor non-elective contribution plans. Additionally, the Act permits a plan to be amended to become a non-elective Safe Harbor plan any time prior to the 30th day before the close of the plan year. A plan can even elect to become a non-elective Safe Harbor plan after that date, as long as they do so before the close of the following plan year; there’s a cost to waiting, though, since the required contribution increases to 4% of each eligible participant’s pay if using the extended adoption deadline.
Extending credit – The federal government has long offered tax incentives for businesses to adopt retirement plans. The incentives were boosted under SECURE by increasing the available tax credit for starting a retirement plan to $5,000. Small businesses with as many as 100 employees that incorporate automatic enrollment in their retirement plan are eligible for an additional credit of $500 a year for up to three years. Small-business owners now have a new incentive to consider establishing a retirement plan if they didn’t already have one.
Less-taxing Extension – In addition to the tax incentives, SECURE extends the deadline for employers to make a retirement plan available and still qualify for the tax incentives to help more businesses get on board the retirement express. The deadline is now extended to the due date for an employer’s tax return, including extensions, rather than the previous Dec. 31 calendar deadline. The need to reduce a tax liability, either at the corporate or personal level, is added encouragement for more businesses to start retirement plans.
Income for Life – As a reflection of its acronym, SECURE incorporates several provisions designed to encourage employers to offer lifetime income annuities to help retirement plan participants turn their savings into retirement income. The goal of offering annuities within a retirement plan is to help ensure retirees do not run out of money, especially in the later years of retirement when they are most likely to incur both healthcare and long-term care expenses.
A big step to encourage more employers to incorporate annuities within their retirement plans is the enhancement of the existing “Safe Harbor” protection for employers to assess and select financially secure life insurers to provide annuities under qualified plans. An annuity is the only product available on the market that can guarantee income for life. However, an annuity is only as secure as the life insurer that underwriters it so it’s critically important to purchase one from a financially secure life insurer that has the financial strength to withstand the test of time.
But annuities can be difficult for some consumers to understand so SECURE includes another change that underscores not only the value of annuities but puts the value of retirement savings in perspective. Doing so, it is reasoned, might spur workers to save more in order to create more guaranteed income for themselves in retirement.
A little farther down the road, SECURE will require that retirement plan sponsors, with an assist from their providers, generate a lifetime income disclosure on benefit statements for 401(k) and other defined contribution plans. The statements would disclose at least annually how much income a specific amount of retirement savings could be expected to generate. The income figure would be calculated by the retirement plan’s provider or recordkeeper based on an assumption that the entire savings amount would be used to purchase an annuity. The Department of Labor has been directed to formulate rules for the disclosure.
A separate rule would allow participants in qualified defined contribution plans (including 401(a), 401(k),403(b) and governmental 457(b) plans) greater flexibility to roll their savings within a lifetime income product such as an annuity into an IRA or other retirement plan if their current income option is eliminated by their employer. Currently, a lack of flexibility can leave savers with limited options.
To-Dos for Tomorrow
Later this year, retirement plan providers are expected to begin introducing new products and platforms to take advantage of what is perhaps the biggest opportunity for small businesses and the advisors who support them: the expansion of Multiple Employer Plans.
SECURE enables unrelated employers to band together to create a single retirement plan under the auspices of a Pooled Plan Provider as opposed to creating separate plans for each business. The change offers the potential to reduce costs, cut regulatory red tape and limit legal liability for businesses. It’s like neighborhood dogs forming a pack to catch a car and then sharing a ride to the butcher shop.
Previously, employers could form MEPs only if they shared a common economic or representational nexus or interest, such as members within a professional association. That requirement curtailed the more widespread use of MEPs.
In order for a plan to be treated as a Pooled Employer Plan a “pooled plan provider” (PPP) will have to be selected and be responsible for performing all necessary administrative duties to ensure compliance with regulations such as ERISA and the IRS Code. The PPPs will serve as a fiduciary and administrator, and be subject to registration, audit and examination by regulators.
That’s an important consideration because the previous “One Bad Apple” rule discouraged many employers that would otherwise qualify from joining MEPs. Under the rule, a regulatory violation by a single employer or “bad apple” could potentially disqualify a MEP. But no longer.
Congress has directed the Department of Labor to create simplified reporting for MEPs that cover fewer than 1,000 employees as long as each participating employer has fewer than 100 employees participating in the plan.
Advisors are encouraged to work with retirement plan providers to learn more about the new opportunities available as the new regulations, products and programs create through SECURE roll out to the marketplace. Those who start chewing on the possibilities and act on them are going to be as happy as a dog with two tails.
Bob Carroll is Head of Workplace Distribution for Massachusetts Mutual Life Insurance Company (MassMutual®).
The information provided is not written or intended as specific tax or legal advice. MassMutual, its subsidiaries, employees and representatives are not authorized to give tax or legal advice. Individuals are encouraged to seek advice from their own tax or legal counsel.