How the SECURE Act improves chances of retirement security for more Americans

The SECURE Act may be the most significant piece of legislation to affect retirement plans in years and presents a much-needed solution to the retirement savings crisis afflicting Americans of all ages.

A flawless solution/? Probably not. But after a bipartisan sail through the U.S. House, its stall in the Senate has some observers concerned. In the interim, perfect solution or not, there’s worry we may be losing a golden opportunity to help the significant number of people who would benefit by the SECURE Act’s provisions.

Retirement preparedness – or lack thereof – is a huge problem in our society: A recent Federal Reserve report  finds that 42% of Americans between 18 and 29, and 26% between 30 and 44 have no retirement savings at all. Older Americans – though in smaller percentages – are similarly unprepared: 17% of those aged 45 to 59 and 13% of those 60 or over have no financial cushion at all.

A big part of the problem is that small businesses – specifically those with fewer than 100 employees – don’t typically offer retirement benefits. Only 42% offer them, with or without insurance benefits, research by LIMRA shows, though 40% of employers believe they are more important today than three years ago.

It’s those organizations, in fact, that the SECURE Act is focusing on with a variety of incentives to encourage them to be more like their counterparts on the big business side of the fence. Our nation’s 10,000 largest companies, employing some 60% of the nation’s workers, have the resources and tax incentives that make retirement plans – these days, 401(k)s – pretty much a standard benefit, and one that experiences a 98% coverage rate.

The SECURE Act offers small businesses more incentives, more flexibility in what they can and can’t do and, importantly, makes changes to enable and improve individual participation. Among the most significant provisions:

• “Pooled” plans. Access to the kind of retirement plans bigger businesses can afford has been one barrier. And even so, there are fiduciary concerns. An important provision under the act is allowing open Multiple Employer Plans (MEPs) for small businesses, not limited by shared geography, trade or profession as per the “closed” MEPs of the past. The legislation specifically insulates businesses in pooled plans from penalties for other members’ violations of fiduciary rules, adding considerably to their appeal.
• Increased tax credits. Businesses with less than 100 employees are encouraged to start a new retirement savings plan through a boost in the tax credit to $5,000 from $500. Another credit, for $500, applies when the business adopts automatic enrollment for its plan. Automatic enrollment has been shown to improve participation rates.
• New flexibility in certain rules. Various rules have been relaxed under the SECURE Act as legislators have attempted to address common small business concerns over meeting the costs and administrative complexities of today’s 401(k)s. These changes allow them to switch to a safe harbor 401(k) during or after a plan year. Another provision increases the cap on the default rate for contributions under a qualified automatic contribution arrangement from the current 10% to 15%.
• New rules on annuities. Many plans have tended to stay away from annuities over concerns about the liability involved in choosing an annuity provider. Updated safe harbor provisions in the legislation, however, allow plan sponsors to select annuity providers in order to offer them in a 401(k), under more relaxed qualification parameters.
• Opening eligibility to long-time part-timers. Part-time employees – restaurant workers and retail employees, for example – are among those who typically don’t have access to an employer’s retirement plan, but this could change for them under the SECURE Act. The current threshold of completing at least 1,000 hours of service in a year is reduced to 500 hours for any employee who completes that number of hours in three consecutive years. This doesn’t apply to plans that are collectively bargained and the ability to exclude workers is not affected (providing nondiscrimination tests are passed).
• Removal of age limitations on traditional IRA contributions. By barring contributions to traditional IRAs after age 70.5, those who continue to work past the traditional retirement age were limited on their savings option. This is now no longer the case.

Americans have had a long-standing problem in putting money aside, whether for a rainy day, future education needs or retirement. Savings trends are, however, starting to ratchet up, averaging 7.6% in 2018  after averaging 6.7% in 2016 and 2017. Better positioning for retirement really takes a savings rate of 10% at a minimum and, ideally, closer to 15%. Getting people there is the issue. Aspects of the SECURE Act will help in a big way.

David Reich is Hub’s National President of Retirement Services, Hub International Investment Services. Registered with Hub International Investment Services Inc., Member FINRA/SIPC and Hub International Investment Advisory Services Inc., a SEC Registered Investment Advisor. David is a recognized thought leader in the financial services industry with demonstrated success building teams, creating executable strategies and driving sustainable results. Leading by example, he is experienced in turn-around, greenfield, and targeted-growth situations. With a passion for helping more Americans better prepare for retirement, his teams have delivered outsized sales growth through advisors for the benefit of the investors, participants and plan sponsors they serve. Dave is a frequent speaker at industry conferences as well as mutual fund and recordkeeping companies.