This past December, the Setting Every Community Up for Retirement Enhancement (SECURE) Act was signed into law, easily the most significant piece of retirement plan legislation passed in over a decade. The SECURE Act includes several provisions that will directly affect retirement savers right away. For example, the starting age for required minimum distributions has been raised from 70½ to 72, and traditional IRA contributions are now permitted after age 70½. These simple changes essentially allow Americans to utilize their favorite tax-advantaged savings vehicles for a longer period of time.
A large portion of the SECURE Act also focuses on ways to improve retirement readiness by expanding employer-provided plan access. Businesses that currently sponsor a 401(k), for instance, will soon have to permit many of their long-term, part-time employees to contribute to the plan. Further, since costs can often be a major obstacle preventing many small employers from sponsoring a retirement plan, the SECURE Act has increased the potential tax credit from $500 to a maximum of $5,000 per year for the first three years to help offset plan startup outlays. Moreover, automatic enrollment is one of the most effective ways of nudging Americans into saving for retirement, and the SECURE Act has therefore also raised the additional credit for small employers that incorporate this plan feature into their 401(k) plans.
Perhaps most importantly, the SECURE Act now allows the offering of a single defined contribution (DC) plan that several unrelated employers can join. The pooling of assets in these “open” multiple employer plans (MEPs) can enable more firms to enjoy lower costs due to economies of scale, and a reduced fiduciary liability is possible as well. There are many other provisions in the SECURE Act, and a natural question is whether all of it actually helps better prepare Americans for retirement. The short answer is yes, according to a new study by the Employee Benefit Research Institute. Specifically, the analysis estimated what effect three key provisions may have on retirement savings shortfalls, i.e. the wider MEP access, the higher cap under which sponsors can automatically enroll workers in “safe harbor” retirement plans, and the new coverage of long-term, part-time employees.
The ultimate success of these provisions will depend in part on how many employers that do not currently sponsor a retirement plan adopt an open MEP, as well as how many workers opt-out of participating. In a more optimistic scenario where open MEP adoption is high and employee opt-out rates are low, there is an estimated 9.9 percent increase in net retirement savings surpluses. Although already impressive, this jumps to as high as 45.4 percent when focusing on younger workers (ages 35-39) at smaller companies (fewer than 100 employees), arguably the group most likely to benefit from these provisions of the SECURE Act. The report’s authors added that the results could look even better if an additional auto portability program is incorporated to address retirement plan leakage.
Sources: J.P. Morgan, EBRI
Post author: Charles Couch