We commend recent efforts in Congress to better position the American workforce for retirement by updating current retirement savings policies through proposed legislation, specifically the Setting Every Community Up for Retirement Enhancement Act of 2019 (the SECURE Act). If enacted, SECURE would represent the biggest overhaul for retirement plans since the Pension Protection Act of 2006.
Following the passage of the SECURE Act with overwhelming bipartisan support by the House of Representatives in May 2019, the Senate now has an opportunity to enact this critical legislation—and we encourage them to do so.
According to the U.S. Bureau of Labor Statistics’ March 2019 National Compensation Survey, nearly half of the private-sector workforce did not participate in a workplace retirement plan, while approximately a third of all private-sector workers did not even have access to a retirement plan. A June 2015 U.S. Government Accountability Office report found that more than half of households age 55 and older have no retirement savings in a defined contribution (DC) plan or Individual Retirement Account (IRA), and Social Security provides most of the retirement income for approximately half of households age 65 and older. The Real Deal: 2018 Retirement Income Adequacy study published by Aon, which evaluated retirement plan participants across nearly 30 industries, found that only one in three full-career workers are on track to retire comfortably by age 67, and with many individuals cashing out their DC plans when they move employers, workers who are not “full-career” are often even worse positioned in retirement.
Through the current legislative proposal, our country can transform the future of retirement for American workers by expanding access to qualified employer-sponsored retirement plans, driven primarily by the expansion of open multiple employer plans (open MEPs). In addition, the SECURE Act would make more lifetime income options available through safe harbors, translate savings into monthly income, and simplify plan administration to encourage sponsorship of qualified retirement plans. Collectively, these enhancements will benefit American employers, workers, and retirees by providing the conditions for greater financial security and retirement readiness.
The SECURE Act includes provisions to allow for an open MEP, in which unrelated employers can join a “pooled employer plan.” As pooled plans, these open MEPs will be able to achieve size and scale that leads to more sophisticated and cost-efficient institutional investment options and lower administrative costs. Given benefit plan participants typically pay for administrative and investment costs either directly or indirectly, these individuals will reap the added value of these changes. Aon’s modeling suggests that a participant’s retirement income could improve 15% to 20% or more after a career of participation in an open MEP with best practice design features.
In addition, the SECURE Act provides that the open MEP could be managed by a “pooled plan provider,” a third party that would be responsible for plan administration and serve as the primary plan fiduciary. This alleviates the risk and burden that would otherwise be assumed by employers. This will be particularly appealing to small- and mid-sized employers that don’t often have the staff with time or expertise to completely fulfill those functions. Open MEPs will ensure that the retirement savings of many more Americans join the millions whose retirement savings is in the hands of the best experts in this field.
Open MEPs will bring new employers and savers into the retirement industry, increasing the opportunity for American workers to achieve retirement readiness with greater access to qualified, employer-sponsored retirement plans and more awareness of the importance of saving and the tools available to do so. It will be important for policymakers and regulators to continue a vibrant public policy dialogue about ways to further increase the economies of scale and leverage necessary for a successful introduction of this transformational opportunity to enhance retirement income, including ways for existing plan sponsors to participate.
Lifetime income options
The financial planning process is complex and many participants are not knowledgeable about longevity risk and are uncertain about how to appropriately draw down their retirement assets. Under the SECURE Act, DC plans will be required to provide lifetime income illustrations reflecting how the assets they accumulate in their plan will translate into retirement income.
The SECURE Act also facilitates access to lifetime income options. This component of the SECURE Act includes a safe harbor for selecting annuity providers and providing for easy portability of these annuities, which will provide a framework for plan sponsors to implement lifetime income solutions in DC plans. This provision addresses the concern for plan sponsors wishing to offer lifetime income options to their participants in DC plans more broadly, and open MEPs in particular.
Simplification to encourage retirement benefits
There are additional provisions throughout the SECURE Act that are designed to encourage retirement benefit offerings and simplify retirement plan administration, including:
- Nondiscrimination testing relief for pension plans still providing valuable retirement benefits to long-tenured employees.
- More time to adopt retirement plans, allowing employers more flexibility to offer plans at start up or during a transition.
- Consolidated Form 5500 filings for similar plans with the same investments and fiduciaries, which is particularly relevant to achieving economies of scale for plans that are not part of a MEP.
- Increased tax credits for small employers to establish a retirement plan.
- Expanded retirement plan access to long-term, part-time employees.
Provisions in the SECURE Act will make huge strides in modernizing the U.S. retirement system by providing American workers increased access to workplace retirement plans through the expansion of open MEPs and by enabling employers to provide valuable retirement benefits and plan features. The adoption of these enhancements will result in better outcomes for American employers, workers, and retirees.
We urge Congress to enact the SECURE Act now. Such action will be transformational for the retirement ecosystem, helping to secure the financial future for American workers at employers of all sizes and across all sectors.
This byline was written by Paul Rangecroft, Head of North America Retirement Consulting and Administration, Aon; Steve Cummings, Head of North America Investment Consulting, Aon; and Lynn D. Dudley, Senior Vice President, Global Retirement & Compensation Policy, American Benefits Council. The opinions referenced are those of Aon Hewitt Investment Consulting, Inc. (AHIC) as of the date of publication.
This feature is to provide general information only, does not constitute legal or tax advice, and cannot be used or substituted for legal or tax advice. Any opinions of the authors do not necessarily reflect the stance of Institutional Shareholder Services or its affiliates.