Congress’s well-intentioned plan to bolster retirements for working Americans – the Setting Every Community Up for Retirement Enhancement (SECURE) Act
– will come with its own set of wrinkles and challenges for defined-contribution plan sponsors (e.g., 403[b], 401[k], etc, which I’ll collectively refer to as “401[k] plans,” for the purposes of this article).
I have to be brief and selective, but here are a few topics to consider carefully if you are tasked with administering the plan for your co-workers or employees.
“Lifetime Income”-Related Provisions
Non-public sector pensions are rare. The folks who do have pensions typically enjoy the peace of mind that a “guaranteed” stream of income carries with it. That stream feature can be privately offered as a “bolt-on” to existing 401(k) plans.
However, these contracts (i.e., annuities) carry extra complications, involving actuarial assumptions and multiple choices for participants. So, part of the Act includes a fiduciary safe harbor (section 204)
for plan sponsors. In short, plan sponsors should maintain a “fiduciary file” on their due diligence for these annuities. (Hopefully, your fiduciary file already exists! This should simply comprise additional notes and documents to add to it.)
Disclosure Regarding Lifetime Income
Whether a plan chooses to ACTUALLY offer a lifetime income option or not, section 203 now requires plans to annually ILLUSTRATE to participants the monthly income stream they could receive if they were to annuitize. For some participants, this may be a helpful way to frame their balance, so that it is relevant to their decision making.
Unfortunately, the Act leaves the actuarial and investment assumptions yet to be written. They may even be written as ranges. This means that there is room for confusion, and adjustments will be necessary for good analysis and comparison between different contracts. I haven’t met many sponsors of plans that have the time or specialized knowledge to do that.
Even more, this heightens the need for educational resources for participants. One assumption that HAS been written is that the participant has a spouse of equal age (for joint and survivor annuity illustration). It seems unlikely that many participants will read print that fine, though.
Auto Enrollment Tax Credit
This is simple on the surface, but beware of disgruntled employees who forget to opt out, and then have their paycheck deferred! Consider this option carefully if you have 1) high employee turnover, 2) currently low participation rates, and/or 3) an employee base that you would generally characterize as likely to overlook a directive on one of their benefits.
That being said, this is generally a good fit for many plans, with careful planning, implementation, and execution. Unfortunately, the deadline for implementation to get tax credit for 2020 was January 1 of this year. Yes, the deadline was the day the plan was enacted, 11 days after it was signed into law on December 20, 2019.
Long-Tenured Part-Time Employees
An effort was made to include a demographical shift of workers who are long-time, part-time workers, sometimes at more than one employer. There is now a dual eligibility consideration: 1000 hours, or three consecutive years of at least 500 hours of service.
Congress addressed the potential wrinkle to compliance testing by exempting from certain tests those workers eligible only as a result of the three-years-at-500-hours provision.
Changes in Required Minimum Distributions (RMDs)
It’s not uncommon for companies to write into their plan documents a clause that forces former employees out at a certain age. That lifts the burden of administering RMDs from the company.
But for those plans that have retired participants aged 70 ½ … well, now it is age 72 before mandatory withdrawals begin.
Still, consider whether retaining that compliance burden is right for the plan and the employee. These income annuities are now much more portable as a result of section 108, so flexibility is increased for employees that would be affected.