How the SECURE Act Enables Employers to Offer Better Benefits

Employers have a powerful way to increase the value of their employee benefits. It's called the Setting Every Community Up for Retirement Enhancement (SECURE) Act.

Signed into law December 2019, the SECURE Act will fundamentally reshape how organizations provide retirement benefits in the future. The law modernizes the U.S. retirement system with new approaches to benefits that allow more people to access and improve overall retirement readiness.

Here are the three significant shifts employers should know:

Retirement Plans Will Provide More Lifetime Income Options

Employers crave certainty when it comes to retirement benefits, and that's what the SECURE Act provides when it comes to lifetime income options. If plan sponsors select lifetime income options for their employees, they have a safe harbor in the SECURE Act, which means they reduce legal liability as long as they follow the rules laid out in the law.

The law improves the portability of lifetime income options. Previously, plan sponsors were hesitant to offer annuities in a defined contribution plan, such as a 401(k), because of how illiquid these investments were compared to other options. Under the safe harbor rules, plan sponsors can switch annuity providers without disrupting participants' accumulated lifetime income by avoiding surrender charges and additional fees associated with a provider change in the past. Plan participants can now transfer their lifetime income option into another qualified retirement plan or an IRA.

The SECURE Act may shift how employees fundamentally view their retirement savings. Plan sponsors will be required to show monthly income benefit illustrations to plan participants. These mandatory projections will show the monthly income stream participants are expected to receive in retirement rather than focus on the total lump sum.

Employers are excited by the possibilities of lifetime income options. Almost half of plan sponsors think the SECURE Act's lifetime income provisions will have the greatest impact on retirement programs in the next five years, according to a recent survey.^[1]

More People Will Have Access to Better Retirement Plans

While plan sponsors are excited that the SECURE Act allows them to provide more lifetime income options, they may overlook a part of the law that can potentially transform the entire retirement landscape.

Under the law, organizations will soon be able to band together to offer a pooled employer plan (PEP) and will no longer need to sponsor their own individual workplace retirement plans. The law permits unrelated employers of any size and from any industry to join together to provide a defined contribution program to their employees. With a PEP, more participants can access best practices to lifetime income options, automatic contribution and escalation features, and better user experience.

Pooled employer plans will expand retirement coverage to more organizations, especially small and midsize companies. It's not just full-time workers who will benefit either. The law makes long-term, part-time employees eligible for workplace retirement plans. Only two out of five part-time employees currently have access to workplace retirement plans.^[2] Under the SECURE Act, employees who work at least 500 hours for three consecutive years will have access to salary deferrals into retirement savings plans. However, employers are not required to contribute.

The SECURE Act will provide more flexible distributions for participants in workplace retirement plans and investors in individual retirement accounts (IRAs). Plan sponsors can accelerate distributions to non-spouse beneficiaries. That means payouts after a plan participant's death occur over ten years rather than a lifetime, which eases employers' administrative burden and gives the family of the deceased participant more financial options. The law also raises the required minimum distribution age for participants in traditional IRAs from age 70.5 to 72 years, which gives IRA investors more time to have their holdings grow on a tax-deferred basis. And defined benefit pension plan participants will be able to take in-service distributions as early as age 59.5. Bottom line: These rules are adapting to an environment where people slowly phase into retirement.

Plan Administration Can Be Easier and Less Risky

Employers have struggled with the risk of costly lawsuits over retirement plan fees and investing options. Under a PEP, the retirement plan will be managed by a "pooled plan provider," who will be the primary plan fiduciary and administrator. This structure reduces the fiduciary risk and administrative burden employers face when they sponsor workplace retirement plans.

Regardless of what type of retirement plan an employer offers, the SECURE Act simplifies plan administration. For example, the law eliminates certain notice requirements for plan sponsors, allows them to adopt retirement plans up to the tax filing due date, and gives employers greater flexibility to offer plans during a transition. Large employers often have many similar retirement plans with the same investments and fiduciaries. Now organizations can file a single, consolidated Form 5500 with the Department of Labor for retirement plans with the same investments and fiduciaries.

Employers who understand the ways the SECURE Act revolutionizes retirement benefits will have a competitive advantage. Plan sponsors have the opportunity to take action now to harness the changes from the law to improve the retirement readiness for their employees.

^{[1] Poll of 415 respondents from Aon’s SECURE Act webinar}

^{[2] U.S. Bureau of Labor Statistics}

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