Over the past several years, Aon actively engaged with members of Congress, Congressional staff, and private industry leaders on retirement legislative proposals and offered our expertise in retirement and investments. Aon participated in public forums regarding these proposals and commented on specific needs in the legislation and forthcoming regulations to facilitate the most effective roll-out.
In the year-end spending bills, Congress included the Setting Every Community Up for Retirement Enhancement Act of 2019 (the SECURE Act). The SECURE Act had strong bipartisan support, initially passing in the House in May and nearly making it through the Senate with unanimous consent earlier in 2019. With that support, the earlier bills were added to the spending bill without significant adjustments.
The retirement program changes in the year-end spending bill have come to fruition following several years of exploration and interest. Aon has actively engaged with members of Congress, Congressional staff, and private industry leaders on retirement legislative proposals and offered our expertise in retirement and investments. Aon participated in public forums regarding these proposals and commented on specific needs in the legislation and forthcoming regulations to facilitate the most effective roll-out.
The SECURE Act and other retirement provisions in the year-end spending bill address broad changes to retirement programs and, also, include provisions that are specific to individual scenarios (e.g., provisions regarding volunteer firefighter benefits). Six key themes emerge from these provisions that improve retirement programs. While these themes do not address all the retirement-related provisions, they showcase the breadth of the changes.
Theme 1: Expand access to defined contribution plans through open multiple employer plans (Open MEPs)
Under the SECURE Act, a “pooled employer plan” is a multiple employer plan (MEP) that covers the employees of unrelated employers. In the broader market, this type of plan is referred to as an Open MEP.
Before SECURE passed, to be considered a single plan, a MEP could include only participating employers that were related or otherwise demonstrated commonality. By removing this restrictive requirement, the law will permit unrelated employers of any size and from any industry to join together to provide a defined contribution program to their employees. The expectation is that Open MEPs will achieve size and scale leading to more cost-effective, best-in-class investments and lower-cost administration.
Importantly, the SECURE Act requires that the Open MEP will be managed by a “pooled plan provider,” who would be the primary plan fiduciary and administrator. This alleviates the risk and burden otherwise borne by employers who typically appoint employees and executives to serve in this role.
While the focus of the SECURE Act is to encourage expansion of retirement programs among small or midsize employers, it is expected that large employers will find the Open MEP concept appealing as it offers an opportunity to outsource fiduciary risk and promote enhanced retirement security for their participants.
Other sections of the SECURE Act address issues that help support the Open MEP concept. For example, SECURE permits consolidated Form 5500 filings for an Open MEP—meaning that participating employers would no longer need to prepare their own filings.
Theme 2: Support lifetime income in retirement plans
The SECURE Act incorporates provisions to improve access to lifetime income options. Further, the SECURE Act seeks to promote education and increased awareness about retirement income. One important component of SECURE is a safe harbor for selecting annuity providers. Previously, plan sponsors were, at times, hesitant to choose annuities in a defined contribution plan due to the illiquidity of the obligation compared to the ease at which other types of investments can be moved. This safe harbor will provide a framework for plan sponsors to more comfortably select an annuity.
The illiquidity is addressed in a special provision that allows portability of lifetime income investments when it is no longer authorized under the plan. This opens the possibility for plan sponsors to change providers when appropriate without disrupting the lifetime income that plan participants accumulated or require the participant to face surrender charges or other types of fees.
As a final measure, the SECURE Act requires that defined contribution plans provide lifetime income illustrations to help plan participants understand how defined contribution accumulations translate to retirement income. This is an area that the Department of Labor (DOL) has explored for several years. While this push to educate the public is an important step forward, defining the criteria for the conversion will be necessary and we believe it will create significant discussion.
Theme 3: Encourage automatic features
The SECURE Act, like the Pension Protection Act of 2006, advocates for defined contribution plan automation, such as automatic enrollment and automatic escalation of contributions. SECURE changes the nondiscrimination testing safe harbor for plans with automatic enrollment. In the past, those plans could include automatic escalation up to a maximum of 10% of pay. Under SECURE, that limit is increased to 15% of pay.
The Act also provides additional credits to small businesses that implement automatic enrollment.
Theme 4: Simplify retirement plan administration
Throughout the SECURE Act, there are provisions that are designed to simplify the administration of retirement plans. These changes include:
- Elimination of notice requirements such as the annual notice for certain safe harbor plans;
- More time to adopt retirement plans by allowing adoption up to the tax filing due date, thus giving employers greater flexibility to offer plans at start up or during a transition; and
- Consolidated Form 5500 filings for similar plans with the same investments and fiduciaries.
Theme 5: Encourage plan sponsors to provide retirement benefits
The SECURE Act includes provisions that encourage plans to offer—or continue to offer—retirement benefits. Of interest to sponsors of defined benefit plans, the SECURE Act includes relief from nondiscrimination rules for closed plans that do not allow new participants. Special nondiscrimination testing provisions are also included for grandfathered contribution provisions in defined contribution plans.
For small employers, the tax credit to start a plan is increased.
In addition, the SECURE Act contains provisions to expand coverage to long-term, part-time employees. Employers that exclude part-time employees from their retirement plans will be required to offer coverage when employees have worked steadily at their employer for at least 3 years with at least 500 hours per year.
Theme 6: Acknowledge changes in retirement patterns
The final major theme we noted for plan sponsors includes adjustments and updates reflecting current trends in the US workforce such as a part-time transitional employment period before “full” retirement and working beyond “traditional” dates of retirement. Provisions reflecting these changes in retirement patterns include:
- The age when minimum distributions are required to begin would increase from 70½ to 72. Given that many people plan to continue working at least part-time before fully retiring, this change may provide additional flexibility to address diverse needs. The push back in the required start date also could shift retirement income to later years of retirement which may help address the risk of longevity, especially for those who use required minimum distributions to define their retirement income.
- Pension plans will now be able to offer in-service distributions as early as age 59½, similar to defined contribution plans. In the past, these in-service distributions were limited to those age 62 or older.
This expansion may allow individuals to move to part-time employment, supplemented by pension benefits.
The SECURE Act makes huge strides toward modernizing the US retirement system and creates new approaches to providing retirement benefits through Open MEPs. The legislation advances inclusion, diversity and retirement readiness through its many provisions.