Congress is coming tantalizingly close to making it simpler, easier and less costly for small-business owners to provide retirement plans for their employees, extending the prospect of retirement security to millions more Americans.
Simply put, Congress is contemplating changes that would allow small businesses to:
- Band together to offer retirement plans
- Increase lifetime income offerings
- Use enrollment and tax changes to boost worker savings
The House of Representatives last month passed legislation known as the Setting Every Community Up for Retirement Enhancement (SECURE) Act by a strong bipartisan vote of 417-3. The Senate attempted to pass SECURE quickly, but there were “holds” on the bill placed by several Senators for reasons non-germane to the parts of the bill that impacts the life insurance industry. If the Chair and Ranking Member of the Senate Finance Committee – Sen. Chuck Grassley (R-IA) and Ron Wyden (D-OR), respectively – can convince their Senate colleagues to release their “holds”, we expect passage of the bill should follow shortly thereafter. Naturally, there are still a lot of unknowns about the ability to release said “holds” so exact timing is unknown. The White House, for its part, is expected to sign SECURE into law if the bill passes Congress.
Key provisions of both the SECURE and RESA acts have been bandied about by Congress for several years. It’s ironic that the bipartisan legislation finally has its best chance of passage in the current ultra-partisan political environment. It’s proof that miracles can and do happen.
A key motivation for promoting employer-sponsored retirement savings plans is that those who use them typically save considerably more than those who rely upon individual savings plans such as IRAs, especially business owners. Consistent savers in 401(k) plans, for example, had accumulated an average of $167,330, according to figures published by the Employee Benefit Research Institute in 2018.1 That compares to an average IRA account balance of $97,515.2 Both published figures reflect 2016 data, the latest available.
Whatever the motivation, the SECURE Act represents a comprehensive effort to enhance retirement security. This blog addresses a handful of key provisions within the legislation that could make a difference in encouraging more businesses to offer retirement plans:
SECURE would increase the ability for unrelated employers to band together to create a single retirement plan as opposed to creating separate plans for each business. The change could potentially reduce costs, cut regulatory red tape and limit legal liability for businesses.
Currently, employers are allowed to form such arrangements – known as Multiple Employer Plans (MEPs) – but only if they share a common economic or representational interest, such as members within a professional association. That requirement curtails the current use of MEPs.
In order for a plan to be treated as a MEP or what would be called a “pooled employer plan,” a “pooled plan provider” (PPP) would 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 would serve as a fiduciary and administrator, and be subject to registration, audit and examination by regulators.
That’s an important consideration because the current “One Bad Apple” rule discourages many employers that would otherwise qualify from joining MEPs. Under the rule, a regulatory violation by a single employer or “bad apple” can potentially disqualify a MEP.
Congress would make it easier to administer MEPs as well, directing 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.
To enhance long-term financial security in retirement, SECURE includes several provisions designed to encourage employers to offer lifetime income annuities as options within retirement plans. Doing so helps ensure that 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.
One such provision would enhance the current “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 but it’s critically important to purchase one from a financially secure life insurer that can live up to its promises.
Another change that might spur workers to save more for retirement is a lifetime income disclosure. Benefit statements for 401(k) and other defined contribution plans would be required to disclose at least annually how much income a specific amount of retirement savings could be expected to generate. The income figure would be derived 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 would have one year 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.
Anchoring in new Safe Harbors – New protections are included in both bills to promote greater retirement savings. One such Safe Harbor would boost the current cap on compensation that could be subject to automatic enrollment into a retirement plan as well as automatic escalation of those contributions to 15 percent from the current 10 percent. The cap would not exceed 10 percent in the first year under SECURE.
The bills would also snip some red tape by eliminating disclosure requirements for non-elective contributions, that is, money that an employer contributes to a retirement plan regardless of whether an employee contributes. The non-elective contribution must be at least 4 percent of compensation for the disclosure requirement to be waived.
Extending credit – While the federal government already provides tax incentives for employers to create and maintain retirement plans, Congress would give those a boost. The available tax credit for starting a retirement plan would climb to as much as $5,000. Meanwhile, small businesses with as many as 100 employees that include automatic enrollment in their retirement plan would be eligible for an additional credit of $500 a year for up to three years.
Less-taxing Extension – Tax considerations drive many financial decisions, especially when it comes to businesses starting a retirement plan. The proposed legislation would extend the current adoption deadline for a specific tax year to the due date for an employer’s tax return, including extensions, rather than the current Dec. 31 calendar deadline. The need to reduce a tax liability, either at the corporate or personal level, could prompt more businesses to start retirement plans.
The regulatory reforms contained in SECURE could potentially go a long way towards making it simpler, easier and less costly for more businesses to sponsor retirement plans for their employees. That’s an incredibly important development given that the U.S. Bureau of Labor Statistics reports that 49 percent of all American workers do not currently have access to an employer-sponsored retirement savings plan.3
Efforts to reform the retirement system are attracting bipartisan support and momentum is building.
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1 Employee Benefit Research Institute (EBRI), "Consistent 401(k) Participation Leads to Higher Account Balances," 2018.
2 Employee Benefit Research Institute (EBRI), EBRI IRA Database: IRA Balances, Contributions, Rollovers, Withdrawals, and Asset Allocation, 2016 Update," Aug. 13, 2018.
3 Bureau of Labor Statistics, U.S. Department of Labor, "The Economics Daily," Oct.2, 2018.