-A breakdown of breaking news from DWC's Managing Partner, Keith Clark
If you are reading the mainstream press, the SECURE Act being signed into law is just around the corner. While the overwhelming bi-partisan approval in the House of Representatives is an important (and increasingly rare) development, there are still a number of steps that must occur before it becomes law:
- The Senate votes on RESA (their version of the SECURE Act)
- If passed, a conference committee is convened to reconcile the differences in the House an Senate versions
- The reconciled version goes back to both the full House and Senate to be passed again
- The President signs the bill into law
This is very exciting for our industry – but this is only one small step! We have seen bi-partisan support for many of these provisions for years, only to have progress derailed by unrelated partisan acrimony. This is why many in our industry will not get excited until the SECURE Act (or some version of it) gets through reconciliation.
We are bit different; we love this stuff. We do not rely on reading mass-market summaries of the Act. Our Consulting Group actually reads every word of the entire Act. In fact, for those of you that know my business partner Adam Pozek (the Walking ERISA Encyclopedia), he drops everything to read this stuff (he read the Act last night).
The following is a summary of our discussions last night and this morning.
What are the absolute gems in this version of the SECURE Act?
- Creates the Pooled Employer Plan (the new name for what has been referred to as an open MEPs)
- Increases the Required Minimum Distribution start date from 70 ½ to 72 (no one likes calculating a half year)
- Allows penalty-free distributions of up to $5,000 within a year for new parents (birth or adoption)
- Extends the period of time for companies to adopt new plans beyond the end of the year to the due date for filing the company tax return.
- Permits employers to add a safe-harbor feature to their existing 401(k) plans once the year has already started if they agree to make at least a 4% of pay contribution to employees (instead of the regular 3%).
What is potentially much ado about nothing?
The annuities! For those of us that have been around a long time, think back to the early 2000s when all but money purchase plans were first allowed to amend annuities out of their plans. They could not get rid of them fast enough faster. The required disclosures were ridiculous; the insurance-related costs were higher than other investment options; and there was quite a bit of perceived risk. Most in the industry did not understand how to recordkeep or report on insurance.
The addition of a fiduciary safe harbor for the selection of annuity providers along with making them more portable are positive changes, but we question how much traction it will receive. In discussing these provisions, we were all hard-pressed (in our collective years of experience) to recall a single participant who elected an annuity payment from a 401(k) plan.
The SECURE Act provides for the increase in the caps that automatically apply to certain automatic enrollment safe harbor 401(k) plans. Presently, the default deferral rate must start out at least at 3% of pay, increase to at least 6% over the next 3 to 4 years, and can never exceed 10%. The ACT would increase that maximum to 15%. In our experience, very few plan sponsors have elected to go beyond the minimum escalation limit of 6%, so it seems unlikely they would suddenly be comfortable going all the way up to 15% if the SECURE Act is passed. Not to mention, increased caps do nothing to address the administrative headaches and operational errors that dissuade many small businesses from using automatic enrollment.
What are some of the items that may increase plan costs (direct or operationally)?
The major one is allowing ‘long-tenured’ employees that have never satisfied the 1,000-hour requirement to be eligible for the plan if they work 500 hours in a plan year. The Act does allow these individuals to be disregarded for testing purposes; however, tracking this new set of eligibility parameters may present a challenge for payroll and/or recordkeeping service providers.
How about more disclosures? Participant statements would be required to show participants how much monthly income their 401(k) balances would create in retirement. I can’t wait to hear the industry debates about what assumptions to use for things like retirement age, investment returns, and life expectancy. The SECURE Act does direct the Secretary of Labor to provide guidance on these points within a year; however, we are also still awaiting guidance on participant statements that Congress directed DOL to publish back in 2007!
When will all of this be effective?
Assuming some version of the SECURE Act makes its way through the rest of the legislative process without being derailed by any number of political issues, the effective dates vary with some provisions kicking in for 2020 and others for 2021.
We will continue to watch the developments closely, so you can count on DWC to keep you up to date if/when any of this becomes law.