Staying ahead of the competition: 5 things to know about retirement policy legislation

While the greening lawn and budding magnolia tree outside my office window are a great boost for my mood, the emergence of spring is really just a small part of my uplifted spirits. As more coworkers, friends, and family receive COVID vaccines, restaurants bustle with socially distanced patrons, and more Americans return to work, there is a renewed sense of hope and optimism in the air.

With access to vaccine distribution expanding and the economy building steam, there’s increasing belief that a hiring boom may be on the horizon too. The job growth that we saw in March—which was at the fastest pace since summer of 2020– could continue to rise in the months ahead.

For business owners and employees, this is welcome news. But it may also mean that you as employers may need to consider making a few adjustments to benefit offerings in order to attract new, quality workers—and retain your existing talent.

Our recent Principal Business Owner Insights survey of 1,011 small- to medium-sized businesses found that more business owners today see such benefits as a key to their overall success.

• Business owners reported that the top two goals of offering an employee benefits package are affordability (50%) and the ability to attract and retain employees (42%).
• A larger share (58%) now say employee benefits also help improve workforce productivity.

If you’re concerned about staying a step ahead of your competition’s benefit offerings, understanding the legislative work Congress is expected to undertake this year related to retirement savings can help both you and your employees.

5 important legislative updates that could impact retirement savings plans

Optimism remains high that Congress will take up the proposed Securing a Strong Retirement Act (often referred to as “SECURE 2.0”). Developed by Reps. Neal (D-Mass) and Brady (R-TX), this bill is packed with new features that can benefit employers, retirement savers, and financial professionals alike.

1. Start-up tax credit. If you don’t already offer a retirement plan for your employees, here’s some good news: Congress substantially increased the start-up tax credit in 2019 to a maximum possible credit of $5,000 per year for the first three years of the plan’s operation.

SECURE 2.0 would go even further for employers with up to 50 employees:

• 100% of start-up costs could be considered for the credit (rather than the current limit of 50%), making it even more feasible to attain the maximum $5,000 per year credit.
• Additionally, a new credit would be offered equal to a stated percentage of employer contributions up to $1,000 per employee. The stated percentage would be 100% of years 1-2, 75% for year 3, 50% for year 4, and 25% in year 5. Note: This additional credit would be phased out for employers with 51 to 100 employees and would not apply for defined benefit plans.

2. Increased support for automatic enrollment. Our recent Retirement Security Survey found that nearly half of retirees (49%) wished they would have started saving for retirement earlier, and 35% wished they would have saved more in their employer-sponsored retirement plan.

One of the most effective methods to help employees successfully save in a retirement plan is through automatic enrollment. In a 2018 nationally representative survey of private sector workers at small- to midsize-businesses with five to 500 employees, the Pew Charitable Trust found that the vast majority of survey respondents repeatedly indicated that they would remain in a retirement plan and begin saving for their future, if automatically enrolled.

This aligns with what we’ve seen in our own, recent research:

• 90% of participants stay in the plan once they’re automatically enrolled.
• 83% of employees say they’re ok with automatic enrollment at a 6% deferral percentage.

Congress is so inspired by the benefits of automatic enrollment that they would require the feature—along with annual automatic escalation of contribution rates—for most new plans established after enactment of SECURE 2.0 if passed.

Existing plans would be exempted from the requirement. However, whether your business has a plan today or is just starting one, SECURE 2.0 could provide two important incentives for you to do so:

1. A new $500 tax credit per year for the first three years after adoption of the feature.
2. A new safe harbor allowing employers to self-correct innocent errors in the enrollment process within 9½ months following the end of the plan year end in which the error occurred.

3. Encouraging employees burdened with student debt to save. Are you looking to recruit recent college grads, or do you want to help current employees who may be unable to participate in your retirement plan due to student loan debt? Nearly one-quarter of respondents in our recent Retirement Security Survey with plan sponsors reported paying down student loan debt as a financial wellness topic of interest.

SECURE 2.0 aims to give employers a new benefit tool by allowing you to treat student loan repayments as elective deferrals for purposes of making employer matching contributions on behalf of the employee.

4. Helping retirees turn their 401(k) into a guaranteed monthly paycheck. Congress has been appropriately focused on helping savers in defined contribution plans turn portions of their nest eggs into a guaranteed monthly paycheck in retirement. Recent findings from Greenwald Research/CANNEX show 63% of consumers see guaranteed lifetime income—in addition to Social Security—as highly valuable. And, our own Retirement Security research findings revealed that 46% of respondents say that annuity ownership brings them more confidence.

When the SECURE Act passed in 2019, Congress cleared barriers that had previously prevented plan sponsors from adopting guaranteed income options in their plans’ investment menus. SECURE 2.0 would address additional barriers to retirees’ willingness and ability to purchase guaranteed income that are embedded in the required minimum distribution (RMD) rules.

• RMD rules currently prohibit common features of life annuities that help address concerns people have when considering an annuity purchase. For example: Will my payments increase to offset inflation? Or, if I die prematurely, will my family get back the remainder of what I paid for the annuity? SECURE 2.0 would amend the RMD rules to allow basic cost of living increases, return of premium death benefits, and period certain guarantees.
• The current RMD rules have also been an impediment to the use of qualified longevity annuities (QLACs), annuities designed to begin payments at the end of an individuals’ life expectancy, because those rules generally require payments to commence before QLACs begin payments. SECURE 2.0 would address these problems.

5. Expanding opportunities for businesses and organizations to join pooled employer plans (PEPs). Congress first authorized the establishment of PEPs in 2019 with the SECURE Act. SECURE 2.0 would clarify that the small employer start-up tax credit would apply in full for their first three years or any qualifying small employer who joins a PEP and further would allow 403(b) plans to participate in PEPs.

Although SECURE 2.0 has not yet been reintroduced, it is expected to make its way to Congress soon and enjoys broad bipartisan support. We’ll continue to watch closely to see if this bill will be considered as part of a larger legislative initiative or as a separate, stand-alone retirement policy bill.

In preparation for these potential changes, this is a good time to employ a little spring cleaning in your plan design, take stock of your employee benefits strategy, and ensure you can check the boxes to both attract top talent prospects and offer benefits and resources to help your employees build stronger financial futures.

Lance Schoening is Director of Policy at Principal, a leading global financial services company offering businesses, individuals, and institutional clients a wide range of financial products and services, with a strong emphasis on providing retirement plan solutions to businesses of all sizes and to their employees. Based in Des Moines, Iowa, Lance is responsible for analysis of proposed and new retirement legislation and regulation and advocacy efforts in conjunction with industry trades to promote policies that support retirement readiness efforts. Lance also serves as a policy board member of the American Benefits Council and chairs the Retirement Plans Committee of the American Council of Life Insurers.

Disclosures: The subject matter in this communication is educational only and provided with the understanding that Principal is not rendering legal, accounting, investment or tax advice. You should consult with appropriate counsel, financial professionals, and other advisors on all matters pertaining to legal, tax, investment or accounting obligations and requirements.

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