New Legislation Creates Planning Opportunities and Pitfalls.
The SECURE Act (“Setting Every Community Up for Retirement Enhancement Act of 2019”) has now been signed into law and the benefits community is buzzing with opinions and planning ideas in response to the Act. This blog will provide a brief overview of key provisions of the Act and their potential implications.
Multiple Employer Plans
The costs and administrative burdens associated with maintaining retirement plans continues to weigh on smaller employers. In response to these concerns the Act sets the stage for employers with no connection or affiliation to participate in a multiple employer plan (an “open MEP”). Open MEPs hold great promise–they enable employers to achieve economies of scale by pooling resources to retain plan administration, fiduciary and investment services.
In the short term we expect that open MEPs are likely to be a source of some confusion and uncertainty. We can anticipate that a large number of vendors–with varying capabilities, cost structures, and service models will jump into this market. And, we can also anticipate that open MEPs will be a good opportunity for some vendors to slip in layers of opaque fees and recapture some of the revenue lost to fee compression in recent years. However, over the long term, open MEPs will change the landscape for delivering retirement benefits to employees. And, we anticipate that over time open MEPS will ultimately move up-market from smaller employers to mid-sized and even some larger entities. But, that will occur only after a shakeout period in the provider community. So, stay tuned — but be patient.
Lifetime Income (Annuity) Options
In recent years there have been a number of efforts to increase the use of annuities in defined contribution plans. In response to these efforts the Act makes a number of changes intended to encourage the use of annuities in the DC space.
Most significantly, the Act provides a fiduciary safe harbor in the selection of an annuity provider if certain steps are followed. Specifically, ERISA’s fiduciary requirements “will be deemed to be satisfied” if a fiduciary:
• “Engages in an objective, thorough, and analytical search” to identify insurers,
• Considers the financial capability of the insurer;
• Concludes that at the time of the selection of the insurer and upon periodic review, the insurer is financially capable of meeting its obligations under the annuit.
Although a fiduciary “safe harbor” sounds good, it should be noted that the safe harbor for selecting a carrier does not extend any protections with respect to the actual annuity product selected by a plan fiduciary and that a fiduciary must also conduct a separate fiduciary analysis of the prudence and terms and conditions of the annuities selected.
The Act further attempts to increase the use of annuities by establishing new rules allowing a plan to make an in-service distribution of annuities if the plan is amended to eliminate the annuity as an investment under the plan. And, to get participants thinking in terms of life annuities, the Act requires plan administrators to provide each plan participant with an annual notice disclosing the lifetime income stream generated by that participant’s account balance.
Overall, we do not anticipate that the provisions of the Act regarding annuities will have a major impact on plan distributions. Annuity contracts can be extraordinarily confusing and opaque, discouraging both plan sponsors from offering annuities and participants from selecting them when available. The Act is not likely to change many minds.
Plan Distributions: More Opportunities
The Act contains two noteworthy changes to plan distribution rules:
• Retirement plans can now provide for distributions to participants, of up to $5,000, upon the birth or adoption of a child. Employees who take a birth/adoption withdrawal are not subject to the 10% penalty tax on early distributions.
• The age for the commencement of required minimum distributions (“RMDs”) has been pushed back from 70-1/2 to 72.
Both of these provisions are effective January 1, 2020 and employers will need to address design considerations (whether or not to add a birth/adoption withdrawal provision) and administrative implications.
New Minimum Eligibility Rules for 401(k) Plans
The Act adds new rules requiring that a 401(k) plan allow part-time employees to make deferrals into the plan after completing three (consecutive) years of employment in which the employee has at least 500 hours of service. These “long-term” part-time employees are not required to be covered by the employer contributions and the inclusion of these employees will not adversely affect the plan’s nondiscrimination testing.
These new rules are analogous to the “universal availability” rules applicable to 403(b) plans. And, if the experience with 403(b) plans is any guide, we will make two predictions about this provision of the Act:
• There will be some employees (but not many) who utilize this new opportunity to defer some (relatively small) amounts into employer-sponsored 401(k) plans; and
• Employers will have a lot of difficulty figuring out how to administer these provisions and tracking the betwixt and between status of these employees.
Incentives to Establish Plans
The Act contains a potpourri of provisions that seek to incent employers to establish retirement plans and encourage the use of safe harbor designs in the Code. We do not anticipate these changes will have major impact on employer behaviors–but will provide some bonuses for employers who chose to utilize one of these safe harbor designs.
Conclusion
The retirement plan industry has been encouraging the passage of the SECURE Act for many months. And, with good reason–insurers are cheered by the prospects of selling more annuities within DC plans and third-party administrators are looking forward to the chance to build new businesses in the open MEP space. And, by the way, employers and employees might also find some things in the Act that they like.
