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From 401(k)s to stretch IRAs, what the Secure Act means for clients

The recently passed Secure Act is groundbreaking retirement legislation — just like its predecessors, the 1974 ERISA (the bedrock law of employee benefit plans) and the 2006 Pension Protection Act. It will substantially alter the landscape for employer-sponsored retirement plans and individual retirement savers. So, what does this mean for plan sponsors, participants, and clients?

Long-term part-time employees to participate in their employer’s retirement plan
Employers will be required to offer 401(k) eligibility to these employees once they have completed either one full year of service with more than 1,000 hours worked or three consecutive years of service with at least 500 hours worked per year. Under previous rules, part-time workers were often excluded from participating in their employer's 401(k) plans.

Allows for open multiple employer plans
Open MEPs permit unrelated small businesses to band together to form one retirement plan, allowing smaller companies to take advantage of economies of scale and features that typically are available only in larger plans. (Closed MEPs only allow — you guessed it — related businesses.) The new retirement act also removes the one bad apple rule for MEPs. Previously, if a single participating employer in an MEP committed a disqualifying violation, it affected all employers participating in the plan. The act eliminates that provision — which had diminished the attractiveness of MEPs.

Increases the automatic safe harbor deferral maximum to 15% from 10%

The average deferral rate for 401(k)s is currently 8.8% — nearly a full percentage point higher than 10 years ago, according to research conducted by Fidelity — and it is likely to continue climbing as time goes on. By raising the ceiling for automatic in-plan retirement saving, workers will be able to save even more.

The act, passed by Congress in December, no longer allows nonspouse beneficiaries of IRAs to take RMDs over their own life expectancy.

Provides tax credits to businesses that offer auto-enrollment to their employees in 401(k) and SIMPLE IRA plans
When it comes to achieving healthy retirement plan participation, the effectiveness of features like auto-enrollment cannot be overstated. According to research from the Pew Charitable Trusts, plans that auto-enroll have participation rates exceeding 90 percent, compared with participation rates in the 50% range for plans in which workers must opt in. This retirement act provision incentivizes business owners to make enrolling and saving easier for employees.

Provides safe harbor certainty for plan sponsors when selecting a lifetime income provider
Choosing an insurance carrier — just like selecting any retirement plan service provider — is a fiduciary responsibility. The new retirement act includes a provision that removes ambiguity about the vetting process and allows fiduciaries to rely on information provided by the insurer regarding its financial status and products.

Allows portability of lifetime income products if a lifetime income option is no longer available under the plan. Under the act, 401(k), 403(b), and 457(b) plans may make a direct trustee-to-trustee transfer of the lifetime income assets to another eligible retirement plan or IRA.

Requires the inclusion of lifetime income disclosures
The required disclosures should help retirement savers visualize their monthly retirement income by providing a monthly payment projection based on their current savings. Framing future distributions in this manner could be the nudge needed to get clients to start or accelerate their savings journey.

Repeals the prohibition of retirement contributions after the account owner reaches age 70½ and raises the age for required minimum distributions to 72 from 70½
The new retirement act makes retirement account contributions permissible regardless of age—a boon for older Americans who wish to continue or catch up on saving, especially as more Americans work full-time or part-time in retirement. As Americans continue to live longer than before, raising the RMD age to 72 could allow savings to last longer into retirement years.

Removes the stretch IRA option
The act no longer allows nonspouse beneficiaries of IRAs to take RMDs over their own life expectancy. Instead, they will be required to deplete the inherited balance within 10 years of the decedent’s death (although some exceptions would apply).

Allows account holders to make a penalty-free distribution of up to $5,000 from their defined contribution plan or IRA upon the birth or adoption of a child (Taxes still apply)
The distribution must be taken within one year of the child’s birth or the finalization of the adoption to be considered a “qualified birth or adoption distribution.” Though not mandated, it may be repaid back to the account within a yet-to-be-determined time frame.

How to prepare for these changes
Financial advisors servicing retirement plans can help plan sponsors and fiduciaries prepare to comply with the Secure Act’s requirements by coordinating plan reviews with their third-party administrator or recordkeeper. Although many provisions go into effect on January 1, 2020, a remedial amendment period will allow employers to make some changes to their plans as late as the 2022 plan year. Work with them to determine what plan amendments will need to be implemented, where gaps exist in their current plan’s design, and where meaningful enhancements can be made. If you provide guidance to clients about retirement planning, the retirement act could present new planning opportunities.

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