The “will they, won’t they” surrounding the SECURE Act has finally come to an end and the most impactful retirement plan security legislation in decades has been signed into law. This will not only make retirement plans more accessible and affordable for the 500,000+ small to mid-sized businesses currently sitting on the sidelines, but it should also result in more Americans saving for retirement, thus starting to bridge the huge savings gap. For advisors, this opens up a significant opportunity, especially for those who have already recognized the potential in the emerging corporate market.
If, as an advisor, you’re wondering which of the 124 pages of legislation to pay most attention to, here are some of our thoughts:
Allowing for open Multiple Employer Plans (“MEPs”)
MEPs have perhaps been the most heavily talked about part of the SECURE Act. While closed MEPs – in which companies with clear commonalities can offer pooled plans – already exist, allowing unrelated businesses to pool resources has a lot of advisors, PEOs, payroll providers, and others excited. This should conceivably help smaller plan clients gain access to provisions and investments that were traditionally available mostly to larger plan clients. That being said, it’s important to be aware of certain restrictions of MEPs including the standardization of investment options, fiduciary oversight of service providers, plan features like matches and contributions that some sponsors might not be prepared to handle, and other operational hurdles. Employers can be liable for significant damages for jumping in too quickly. It’s worth comparing whether a MEP-like experience, in which one creates their own pooled offering without the confines of a MEP, could be an even better option. Either way, the passage of the SECURE Act opens up the door for you to be having these important conversations.
Access to annuities in retirement plans
More relaxed rules around lifetime income products means better access to more offerings for participants. This is a good thing considering there is no one-size-fits-all when it comes to a participant’s investment strategies and annuities could be a great option for the right investor. However, there is still a lot here to figure out. Because of the complexity of annuities, it can be challenging to incorporate them into a retirement plan without full plan portability or properly disclosing costs and other features. Expect a lot of big annuity players to try to simplify this complex challenge sooner rather than later.
Tax incentives for small business owners to offer a 401(k)
Since much of this provision is centered around making retirement plans more accessible for small business owners, a tax credit of up to $5,000 should serve as a great catalyst. Not to mention that it can help offset any upfront costs that often serve as a deterrent in setting up a plan. Be sure to lay out the numbers for prospective clients, as most of them aren’t following the SECURE Act nearly as closely as we are.
Looser restrictions on eligibility
For example, there will no longer be a heavy penalization on those taking parental leave or working part-time. According to the bill, employees who work 500 or more hours during any consecutive three-year period can participate in their plan and there are other protections in the Act for part-time employees. This is meant to protect participants who may take a leave of absence for parental leave or otherwise, and to generally support more balanced life decisions. This is a shift from the current eligibility rules so it’s important to alert clients to ensure compliance.
New age requirements for Required Minimum Distributions (RMDs)
People are living longer (and often working longer!), so the Act has raised the age from 70 ½ to 72 for employees to begin cashing out their retirement plans. For wealth advisors in particular, this is an important number to (re)factor into long-term planning.
With all of these employer and employee benefits, how is this Act being paid for? Well, there are a few provisions where the revenue stream can help offset the cost.
Eliminating the Stretch IRA
By removing the so-called “Stretch IRA,” certain beneficiaries of a 401(k) plan can no longer hold off paying the tax penalties on withdrawals in perpetuity. This means taxes may now need to be paid within ten years, depending on who the beneficiary is at the time. Again, advisors should make clients aware of this change as needed.
Increasing fees for late or missing Form 5500s
While there have always been hefty penalties for mishandling of 5500s, the fee has increased significantly from a maximum of $50,000 to $150,000. This is an important note for sponsors, but also for the named Plan Administrator who may be ultimately responsible for timely filing the Form 5500.
With the exception of the long-term, part-time employee provisions which are effective in 2021, most of these other changes are effective for plan years beginning on or after December 31, 2019. Yes – – just two weeks from now. Of course there is much more to the SECURE Act including changes to 529 college savings plans, penalty-free withdrawals for the birth or adoption of a child, and others, but by better understanding the imminent changes affecting retirement plans, the impact of the law becomes more clear. While it’s important to lay out a thoughtful strategy for incorporating the Act into your business plan, it’s equally important to think about the downstream implications – good and bad – to your clients. Regardless of how you shift your strategy, the passing of the SECURE Act will undoubtedly change the conversation you’re able to have with clients and that, in and of itself, is impactful.
Vestwell is a digital platform that makes it easier to offer and administer retirement plans. Vestwell removes traditional friction points through flexible investment strategies, fiduciary oversight, and streamlined administration, all at competitive pricing. By acting as a single point of contact, Vestwell has modernized the retirement offering while keeping the advisor’s, employer’s, and plan participant’s best interests in mind. Learn more at Vestwell.com and on Twitter @Vestwell.