On December 20, 2019, President Trump signed the Setting Every Community Up for Retirement Enhancement Act (SECURE Act) into law.1 This new law is a signal achievement for the bipartisan and broad coalition of members of Congress, advocates, and industry groups that spent years pushing to improve the systems that are supposed to help Americans save for retirement. Congress last enacted major retirement legislation in 2006, so progress was not guaranteed. Nonetheless, I remained optimistic, and predicted in a post on the Financial Freedom StudioSM early last year that Congress would get it done. Now, it has.

This post will explain how the SECURE Act addresses several of the big retirement policy problems facing people planning for retirement and society at large. The SECURE Act is not a panacea. Challenges remain, but it is an important step in the right direction.

America’s Big Retirement Policy Problems

America’s retirement system faces three big inter-related challenges:

Coverage. Too few retirement savers have ready access to a mechanism for retirement savings, such as employer-provided plans, which are probably the easiest, lowest-cost ways to save for retirement.

Adequacy. Too many Americans have too little saved for retirement to support themselves for the rest of their lives, especially given that retirements are lasting longer as people who reach age 65 live into their late 80s and 90s, and even longer.

Leakage. Too much retirement savings money is going to non-retirement purposes, such as loans, premature withdrawals with penalties, and fees and commissions.

These problems connect and compound. Leakage hurts adequacy. Lack of coverage makes accumulating adequate savings difficult. People who save too little likely have other demands on their earnings, so they may feel they have no choice but to “leak” retirement savings for nonretirement spending.

To their credit, worker, retiree, and consumer advocates, and the retirement industry, along with academics and think-tank experts, have spent years educating members of Congress about these problems and potential solutions. Their audience was attentive and bipartisan—an uncommon occurrence given the higher profile and deeply partisan issues demanding members of Congress’ time and focus. Retirement policy has long been a bipartisan endeavor, with occasional and notable exceptions. Fortunately, the SECURE Act followed the tradition of bipartisanship.

The SECURE Act’s Solutions to the Big Retirement Policy Problems

The SECURE Act amalgamates more than two dozen complex provisions of law. This discussion will explain those select provisions that are most relevant to coverage, adequacy, and leakage.

Coverage

In March 2019, 71% of employees had access to an employer-provided retirement plan, but only 56 percent participated.2 The SECURE Act seeks to increase these percentages in at least three ways. First, it authorizes “open multiple employer plans” or “Open MEPs.” Small and midsized private-sector employers are least likely to offer a retirement plan because of the cost, complexity, and legal liability issues. Open MEPs, also known as “pooled employer plans,” may be a solution. Open MEPs are group retirement plans for employers that are run by a third-party administrator. Costs and risks for participating employers are lower, although they continue to have fiduciary responsibility for the plan. “Open” means the participating businesses are not required to be related to one another, they need not be franchisees of one franchisor or operate in the same industry). After the SECURE Act, any group of businesses can form an Open MEP. Projections are that Open MEPS will cover hundreds of thousands of additional employees.

Second, the new law increases the tax credit for small employers starting a plan and creates a new tax credit for new plans with “auto-enrollment”—that is, the employer enrolls all its employees, while giving them the choice to opt out. Most employees never opt out, so coverage will grow. Third, the SECURE Act allows employer plans to cover long-term, part-time employees (must be age 21 or older and work at least 500 hours in three consecutive 12-month periods). In March 2019, 25.8 million Americans worked part-time, but only 24 percent of these part-time workers participated in an employer plan.3 Auto-enrollment and coverage of part-time workers are potentially important tools for increasing coverage, if employers use them.

Adequacy

The SECURE Act also addresses adequacy, including most directly by increasing the cap for employees’ automatic contributions to retirement plans from 10% to 15% of compensation. The Act also ensures participants in defined-contribution plans (e.g., a 401(k)) will have greater visibility into their retirement finances by requiring the providers of benefit statements to disclose how much retirement income these participants’ current savings would generate if annuitized. The Act also broadens participants’ access to lifetime income in retirement by making it easier for employer plans to offer annuities* and easing the portability of annuities in employer plans.

The Act also responds to the increasing longevity of people who reach retirement age. It will allow retirement savers to continue contributing to their traditional Individual Retirement Accounts after age 70½. Also, required minimum distributions (RMDs), which is money the law requires you to withdraw from retirement accounts each year—will begin at age 72 rather than age 70½. These changes will mean more time to save for retirement for those who continue working into their 70s. Adequacy should improve for some retirement savers.

Leakage

The SECURE Act does little to address leakage. In fact, one provision allows penalty-free withdrawals from retirement plans for non-retirement spending: expenses related to the birth or adoption of a child. That’s important spending, but it’s not retirement spending.

What’s Left to Be Done

In sum, the SECURE Act expands the coverage of employer-provided retirement plans and helps to increase the adequacy of some Americans’ retirement savings. Yet, it is not a complete solution to either problem, and it does little to address leakage. Three big policy issues remain to be addressed by federal policymakers either this year or, more likely, after the 2020 election.

Social Security and Medicare - Social Security remains the central (or only) pillar of most Americans’ retirement plans. Medicare is older Americans’ principal health insurer. The trust fund that pays Social Security retirement benefits will be depleted in 2034 and Medicare is already in deficit.4 Its principal trust fund may be depleted by 2026. Congress must take action on Social Security’s and Medicare’s finances; however, I predicted last year that members of Congress would not act before the 2020 election. So far, Congress hasn’t proven me wrong. I remain convinced the choices are too painful and complex for members of Congress to take on in an election year.

Mandating Coverage – While the SECURE Act will increase the number of employees covered by employer-provided plans, no one expects it to push coverage anywhere near 100%. Rep. Richard Neal (D-MA) and some states want to get closer to that goal. Rep. Neal chairs the House Ways and Means Committee, the committee with principal jurisdiction over retirement policy. Neal also is the sponsor of the Automatic Retirement Plan Act, which would require all but the smallest employers to establish 401(k) or 403(b) (for non-profits) retirement plans and automatically enroll all their employees in those plans.5 Neal’s proposal has garnered widespread support, including from retirement industry companies and trade associations, but not from the U.S. Senate so far.

At the same time, 10 states and one city already established their own retirement plans for private-sector employees lacking an employer plan.6 Another 20 states are considering legislation to establish new retirement plans or to study the coverage challenge and explore policy options.7

Retirement Investment Advice – Bipartisanship in retirement policy broke down around the rules governing financial professionals who give advice to retirement savers about how and where to invest their savings. In over-simplistic terms, worker, retiree, and consumer advocates want retirement investment professionals subjected to a fiduciary standard of care, while many of those providing advice and their allies prefer a “best interest” standard.

The forum for the fight has shifted over time. It began with a multi-year, contentious, and partisan struggle over the U.S. Department of Labor’s now-vacated “fiduciary rule.” The fight continues with the U.S. Securities & Exchange Commission’s “Regulation: Best Interest,” which is currently the subject of legal challenges by Democratic state attorneys general and others. Now, it will extend to the states as they wrestle over whether to adopt the National Association of Insurance Commissioner’s model regulation governing annuity “suitability” determinations.9 There is no reason to believe this fight will end any time soon, or become less partisan.

Conclusion

The SECURE Act makes important progress solving real policy problems. It deserves its due, as do the people and institutions that made it possible. Yet, this success is not complete. Americans’ retirement security depends upon policymakers doing even more.

 

 

 

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*What is an annuity?

Annuities are long-term, tax-deferred investments designed for retirement. Earnings are taxable as ordinary income when distributed and may be subject to a 10% additional tax if withdrawn before age 59½. 

Investing involves risk including possible loss of principal. 

The opinions and forecasts expressed are those of the author and individuals quoted and should not be construed as a recommendation or as complete.

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The opinions and forecasts expressed are those of the author and individuals quoted and should not be construed as a recommendation or as complete.

1. H.R.1994, “Setting Every Community Up for Retirement Enhancement Act of 2019,” 2019.

2. Bureau of Labor Statistics, U.S. Department of Labor, “Employee Benefits in the United States – March 2019,” September 2019.

3. Ibid.

4. Center for Medicare and Medicaid Services, “2018 Annual Report of the Board of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds,” June 2018.

5. H.R.4523, “Automatic Retirement Plan Act of 2017,” 2017.

6. Angela M. Antonelli, J. Mark Iwry, David C. John, Georgetown University Center for Retirement Initiatives, “Achieving Economies of Scale in State-Facilitated Retirement Savings Programs,” May 2019.

7. Georgetown University Center for Retirement Initiatives, “State Initiatives 2020: New Programs Begin Implementations While Others Consider Action,” 2020.

8. State of New York, State of California, State of Connecticut, et al v SEC https://ag.ny.gov/sites/default/files/doc_01_complaint.pdf, XY Planning Network, LLC v SEC http://guptawessler.com/wp-content/uploads/2019/09/1.-Complaint.pdf

9. National Association of Insurance Commissioners, “NAIC Takes Action to Protect Annuity Consumers,” February 2020.

 

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