Roundtable Dispatch – How Does the SECURE Act Impact You, the Plan Sponsor?
Roundtable Dispatch – How Does the SECURE Act Impact You, the Plan Sponsor?
On January 9, the Defined Contribution Institute held its annual Senior Delegates Roundtable for the institute’s supporting members at the University Club of New York. This peer-to-peer gathering of DC service providers delved into a wide variety of issues relating to the DC industry and its business models, and with the enactment of the SECURE Act just a few weeks prior, the law naturally became a focal point of active conversations and scrutiny among the attendees.
Joining the Senior Delegates Roundtable as the featured guest speaker on the topic, Mark Iwry, former Senior Advisor to the Secretary of the Treasury and Deputy Assistant Secretary for Retirement and Health Policy, provided valuable expert insights into SECURE’s implications for the industry at large.
Mark’s presentation centered around the provisions that will permit open multiple employer plans (MEPs, also known as pooled employers plans) and the questions of how and how widely they will be used, and whether they will help, to some extent, narrow the retirement coverage gap. The coverage gap being a looming national issue given that roughly one third of workers in America lack access to a retirement plan at work and only about 1 out of every 10 IRA-eligible individuals contribute to one.
While open MEPs have received much of the attention from the media and industry insiders for their potential to expand retirement coverage or to combine existing plans, Mark also highlighted a trio of lifetime income provisions that, over time, could potentially become SECURE’s other most important element for plan sponsors.
These three provisions provide an ERISA fiduciary safe harbor for plan sponsors’ selection of annuity providers, require 401(k) plans to disclose to participants each year the estimated lifetime income equivalent of their account balances, and increase the portability of 401(k) plan annuity investments for employees in the event that the plan stops offering those annuity investments.
Other key elements of the SECURE Act that seek to tackle the retirement coverage gap through the employer plans include:
* Expanding tax credits for small businesses starting a new plan, adding tax credits for small businesses that adopt new auto-enrollment features, and expanding the auto-enrollment 401(k) “safe harbor” to cap auto-escalation of contributions at 15% instead of the previous 10% level.
* Requiring plans to allow part-time employees who work at least 500 hours for 3 consecutive years to contribute to the plan, starting in 2024.
However, the element that has arguably captured the most attention within the industry is the expansion of the MEP structure and the potential business opportunities that it may bring. The underlying logic is that allowing multiple unrelated employers to participate in sponsoring the same plan could encourage more small employers to take up plan sponsorship, specifically by reducing their per capita plan administration and investment management costs through economies of scale that otherwise would be available only to larger employers.
Another key element is that the SECURE Act’s open MEP provisions will enable small employers to outsource more of their fiduciary responsibilities and most of their plan management responsibilities to the MEP organizer – professional firms like asset managers and recordkeepers – which will handle the responsibilities with professionalism and efficiency. This might also give small employers more confidence to participate in plan sponsorship by helping reduce their litigation risk.
Allowing the work forces of unrelated employers to be grouped together in a single plan will mean that each employer must decide whether to join the MEP, with the MEP’s organizer being designated by the plan as the fiduciary and plan administrator. Employers participating in the plan will thus have the fiduciary responsibility to prudently select and retain the promoter, and each employer will still be treated as, in effect, sponsoring the portion of the MEP attributable to its participants.
The SECURE Act also eliminated the “one bad apple” rule for MEPs that could have disqualified an entire MEP if one component employer violates the plan qualification rules. Instead, the rest of the MEP will be protected by allowing for the spinoff of a noncompliant portion of the plan to a new, separate plan.
Mark noted that he has long advocated open MEPs and hopes and expects the SECURE Act’s open MEP provisions to make a positive difference. But he questioned whether they would have quite the dramatic effects that some other proponents have predicted. He suggested that, for the most part, it will continue to be true that plans are generally “sold not brought” when marketing to small employers, and that it may be unrealistic to expect a very large proportion of small businesses to band together in open MEPs. Given that many small business owners lack the bandwidth or interest to provide retirement benefits when their priorities are to keep their businesses afloat, and when employees often have other, higher-priority demands.
He opined, therefore, that the expansion of coverage resulting from open MEPs to be incremental despite hopes and some industry projections to the contrary. He observed that the Congressional Joint Committee on Taxation has estimated a relatively moderate increase in tax preferred savings resulting from the open MEP provisions over the next 10 years. This would translate very roughly to about 600,000 to 700,000 new 401(k) accounts over 10 years – a substantial number, but one that would still amount to just over a 1% reduction in the current coverage gap.
SECURE may not be the silver bullet for the retirement crisis that some have hoped it would be, but as a bipartisan effort and the first broad-based retirement legislation since 2006, it nonetheless has provided a much-needed jolt for the DC industry as we continue to grapple with potential solutions. Join us at the DC Institute – Chicago conference on April 1 and 2 to hear more from Mark on what’s in store for plan sponsors and the DC industry as the market begins to digest and apply the new SECURE provisions, as the regulators begin to interpret them (including permitted 401(k) withdrawals for birth or adoption of a child, changes to the age 70 ½ RMD rules, expanded coverage of part-time employees, etc.), and as Congress develops still more ambitious legislative changes for the forthcoming “SECURE 2.0”.