The US House of Representatives recently passed the SECURE Act (Setting Every Community Up for Retirement Enhancement Act of 2019), and now the Senate has the opportunity to consider the legislation or pass their own version, RESA (Retirement Enhancement Savings Act). The SECURE Act and RESA contain many similar provisions covering issues associated with the adoption of Open Multiple Employer Plans (Open MEPS), a fiduciary safe harbor for the selection of annuity providers, a tax credit for small employers that start up a new retirement plan or automatic enrollment provisions, participant disclosures of lifetime income projections of current retirement savings balances, and greater portability of lifetime income investment options, just to name a few.
If either package is enacted, it would amount to the most significant package of retirement reforms since the passage of the Pension Protection Act of 2006. The goal of both bills is to address the gap in coverage of Americans who have access to workplace retirement plans by removing obstacles to the adoption of retirement plans and to make it easier for more employers, small businesses in particular, to offer a qualified retirement plan.
In order to adapt to the coming changes, insurers, record keepers and fiduciaries will need to have a clear record of all the benefits associated with a plan. SS&C’s Retirement Income Clearing Calculator (RICC) income middleware provides a way for retirement service providers to tap into a simple and cost-effective model for the distribution and servicing of guaranteed income products.
The SECURE Act allows for greater portability of retirement accounts—particularly annuities. Annuities have suffered criticism in the past, largely because of their lack of portability. Under current legislation, if an employee selected an annuity from their employer-sponsored retirement offerings, they are generally prohibited from taking that annuity with them, with the result being liquidation of the annuity. This results in fees, extra costs, and loss of savings for the participant.
The SECURE Act will allow participants to either keep the annuity or roll it into an IRA or other qualified plan in the event that the annuity option is removed from the plan’s investment lineup. The annuity would not have to be liquidated and the guarantees would be preserved, allowing greater portability. Annuities are appealing options because they help retirees better plan their retirement spending, ensuring they do not outlive their savings.
In addition to greater portability, the legislation would remove the age cap for contributing to an individual retirement account, and raise the age for required withdrawals for IRAs and 401(k)s from 70 ½ to 72. It would also allow new parents to withdraw $5,000 penalty-free from retirement accounts to help cover expenses related to the birth or adoption of a child.
The legislation doesn’t just benefit participants. Through multiple-employer plans with a pooled plan provider, small businesses can reduce costs and offer 401(k) plans to their employees when they might not have been able to do so previously. The bill includes tax credits for employers that agree to offer such plans, as well as requiring them to offer plan access to part-time employees who have been with the company for a designated time. Currently, employers in a multiple-employer plan must all belong to a similar industry. The new legislation would allow unrelated employers to form a multi-employer plan.
If enacted, these reforms would promote the greater adoption of retirement plans by employers who do not currently offer a retirement plan to their employees, which would result in a far greater number of Americans being covered by a workplace retirement plan. Additionally, these reforms may result in the greater adoption of annuity investment options that provide a guaranteed stream of income in retirement, so that participants are not subject to the risk of outliving their.
Written by Chris Robino
Senior ERISA Counsel