Companies want their older employees to afford a timely, secure retirement. That’s not simply altruism: such workers tend to be highly paid, consume more health care, and miss work more often than others, and block the upward mobility of younger high achievers who may become frustrated and leave the company.
While effective solutions to that cause may elude retirement plan-sponsoring companies, Congress is now positioned as their ally, with pending legislation that would do much to make it easier for people to retire on time.
The legislative aid is sorely needed. The median household retirement savings in the United States is just $50,000, 21% of Americans have no such savings at all, and 46% of retirement plan participants have taken early withdrawals from their accounts, according to Transamerica, a major retirement plan provider.
The risk of outliving one’s savings is all too real. According to the Social Security Administration, men and women that reach age 65 can expect to live an average of 19 and 21.5 more years, respectively. Inevitably, millions of retiring baby boomers will need to stretch their retirement dollars over several decades.
Moving the Needle
It’s this bleak state of affairs, rather than any special concern for the welfare of corporations, that seized Congress’ attention. Chief among the legislative efforts is the Setting Every Community Up for Retirement Enhancement (SECURE) Act. Underscoring the weight of the issue, the House passed the bill in May 2019 by a vote of 417 to 3 — a rare recent example of congressional nonpartisanship.
Although the bill was still stalled in the Senate in early September, the higher chamber this year reintroduced its own, very similar legislation, the Retirement Enhancement and Savings Act (RESA), which was first introduced on the floor in 2016. Presumably, the two chambers will eventually wind up in conference in a bid to hammer out disparities between the bills.
It’s generally considered somewhat likely that some form of retirement legislation will land on President Trump’s desk by the end of his first term. If he signs it, it would mark the first major changes to retirement rules since the Pension Protection Act of 2006.
Among the highlights of SECURE’s 29 proposed rule changes, the bill is designed to encourage employers to include lifetime income investment options (i.e., annuities) within defined contribution (DC) plans such as 401(k) plans. Few companies do so—a key criticism of DC plans as compared with defined benefit (DB) pension plans—because of attendant legal risk.
So, SECURE would lessen companies’ legal liability with respect to annuities. The bill also would allow plan participants to retain such investments upon leaving their employment.
Additionally, the bill would:
• Provide sponsors of closed DB plans with relief from the tax code’s nondiscrimination testing requirements, which are designed to ensure that high-income employees don’t receive a disproportionate share of plan benefits. Under current rules, most closed plans eventually fail the tests and as a result, grandfathered plan participants stop accruing benefits.
• For the first time permit multiple companies with no common organizational traits to jointly sponsor a single, more cost-effective 401(k) plan. This is among several incentives for small businesses to start up a retirement plan.
• Give long-term, part-time workers access to retirement plans. “The legislation is a package of many provisions, each generally non-controversial, bipartisan, and helpful,” says Alan Glickstein, managing director of retirement at Willis Towers Watson. “While no single provision is revolutionary, it would move the needle and help secure retirement for millions of Americans.”
For large employers, SECURE’s most important provision is the relief from fiduciary liability when offering annuities as 401(k) investment options.
The act of choosing an annuity provider is hardly risk-free. In fact, lawsuits against retirement plan sponsors have spiked over the past few years, often on grounds that the sponsor selected a plan with unreasonably high fees — and fees are generally high for annuities. Even employees who merely locked into an annuity and later regretted it may seek litigation.
For those reasons, only 9% of 401(k) plan sponsors offer annuities, according to the Plan Sponsor Council of America.
SECURE would ease fiduciary risk in two ways. First, it requires that 401(k) statements illustrate how much income a participant would receive if the total account balance was used to provide lifetime income streams. Plan sponsors and fiduciaries would have no liability under ERISA solely by reason of offering such income streams, provided that their disclosure included explanations contained in a model disclosure to be developed by the Labor Department.
Second, the legislation would protect employers from liability if they select an annuity provider that, among other requirements, for the past seven years has:
• Been licensed by the state insurance commissioner to offer guaranteed retirement income contracts
• Filed audited financial statements in accordance with state laws
• Maintained reserves that satisfied all the statutory requirements of all states where the annuity provider does business
“Employers would be able to rely on representations that insurers have met certain requirements state insurance regulators have in place to ensure that insurers are in good financial standing,” says Tim Walsh, senior managing director of institutional investment products for TIAA.
Annuities aren’t for everyone, of course. Specifically, some say, they’re less helpful to younger workers.
“With the fees dragging down the returns, I don’t like the [long-term] accumulation side of annuities,” says Eric Droblyen, CEO of Employee Fiduciary, a fast-growing provider of low-cost 401(k) plans. “However, when someone who has worked for many years is worried about the market turning south just as they’re retiring, it’s a good time to think about an annuity.”
Because of the relief from discrimination testing, SECURE would also reduce fiduciary liability for sponsors of closed DB plans, where new employees are ineligible to participate but existing participants at the time of closure continue to accumulate benefits.
The way it stands now with closed plans, over time the population that keeps accruing benefits naturally tilts toward longer-tenured and thus higher-earning employees, in most cases. That increasingly heightens the risk that a company will fail nondiscrimination tests.
“At some point, the only solution under the current rules is to freeze the plan,” says Glickstein of Willis Towers Watson. “It solves the problem but does so by eliminating benefits for everyone. It’s an outcome no one wants to see.”
He adds: “If you had a nondiscriminatory group at the time the plan was closed, participants should be able to continue accruing benefits after the closure as long as the employer wants. It’s not more complicated than that.”
Without a legislative solution, more than 450,000 current pension plan participants could see their benefits frozen by 2020, according to Lynn Dudley, senior vice president of global retirement and compensation policy at the American Benefits Council.
SECURE would alleviate the problem by expanding the currently very limited conditions under which plan sponsors can group closed DB plans with DC plans or employee stock ownership plans for purposes of discrimination testing. “It would just be more practical when all that happened is that people got older, people left the company, and people got hired,” Dudley notes.
All Together Now
Many provisions of SECURE are aimed at providing a steadier path to retirement for employees of small businesses.
The one with the biggest potential impact, by far, is the allowance of “open” multiple employer plans (MEPs). Under current rules, only “closed” MEPs — where the participating employers share one or more common traits such as industry, geographical proximity, or trade association membership — are permitted. Combining the investment assets of multiple small companies would likely result in lower administrative and management fees and costs for a higher-quality retirement plan.
The legislation also would eliminate the 401(k) provider’s fiduciary liability in situations where an MEP member company violates fiduciary rules, which has been an impediment to MEP creation.
If SECURE were to pass with the open MEP provision intact, it could result in a boom of small businesses opening 401(k) plans. “This might be a mechanism that gives nearly half of [employed people in] the country access to some sort of retirement program,” says Glickstein.
Adds Tom Cassara, managing director at River & Mercantile, an institutional investment and actuarial adviser, “The MEP provision has significant appeal to small employers from an investment and administrative standpoint. We believe it will encourage more small employers to introduce such plans and put more money into them over time.”
Even in cases where members of new MEPs already had been offering retirement plans, it would be a big win for their employees, notes Bob Melia, executive director of the Institutional Retirement Income Council.
Melia cites the example of a 25-year-old employee with $25,000 in a retirement account, who adds $10,000 to the account every year, earning a 7% average annual return. Paying just 1% more in fees may cost that millennial close to $600,000 in sacrificed returns over 40 years of savings, he explains.
Another plus for MEP members could be enhanced recruitment and retention of sought-after skill sets. “You would essentially be able to take advantage of large-plan institutional pricing, providing an important ingredient to compete for talent,” Melia says.
On the other hand, Droblyen contends that bulk buying isn’t necessarily a major factor in all retirement plans. “With today’s passively managed funds, a startup with zero assets can get the best funds from Vanguard, BlackRock, or Fidelity, with fees of about $1,500 for a company with 30 eligible employees,” he says.
Among other SECURE provisions aimed at small companies, the employer tax credit for setting up a 401(k) plan, currently capped at $500, would be boosted to as much as $5,000 in each of the plan’s first three years.
Also under SECURE, part-time employees that work at least 500 hours per year for three years straight would be eligible for 401(k) plans. Current rules require a minimum of 1,000 hours per year to receive a retirement package.
The inclusion of part-timers “reflects how the workforce is changing,” says Glickstein. “There’s also a gender aspect to it, because so many women work part-time. The opportunity to improve the financial situation for workers in this category is significant, although it does require some effort and cost for sponsors.”
Long-awaited, substantially improved retirement readiness? With reluctant-to-retire baby boomers clogging up the workforce, it would be sure to lighten the hearts of aging workers and their employers alike.
Russ Banham is a Pulitzer-nominated journalist and best-selling author.