The SECURE (Setting Every Community Up for Retirement) Act passed the House recently and is pending in the Senate. There are a number of provisions of the act: some good, some bad, and some could go either way.
Tax Credit for Companies Starting a New Plan (they got it right!)
Reducing taxes while helping your employees save for retirement. A good deal for all!
The act would increase the business tax credit for small businesses starting a new retirement plan from the current cap of $500 up to a limit of $5,000 in certain circumstances. This has the potential to encourage more small businesses to offer retirement plans. The credit is the lower of $5,000 for first 3 years or $250 times the number of non-highly compensated employees (making under $125,000 and not a 5% owner of the business). BidMoni estimates that employers can start plans for as little as $500 based on 401(k) marketplace data. This provision is certainly a win for over 1 million businesses (and their employees) without a 401(k) plan.
Multiple Employer Plans (MEP) ( can be good but buyer beware)
The act has a provision that allows unrelated small employers to band together in an open multiple employer plan. This means companies that are completely unrelated can now join forces to share administrative costs and other savings. Currently employers in an MEP must have something in common such as being in the same industry, the same geographic region, etc.
Allowing small plans to band together for more favorable pricing sounds like a no-brainer, but MEPs are not new to the defined contribution industry and aren’t without drawbacks. One includes limitations on plan design flexibility for individual companies in the MEP arrangement.
So, where have we seen MEPs before? Who remembers this New York Times article regarding the retirement plans offered to many teachers around the country? Non-ERISA plans (State Government, k-12, Universities) have had access to MEPs for decades. They not only failed to drive down costs, many are paying higher fees because of them. Let’s hope this provision doesn’t turn into the same marketing ploy that ended up taking advantage of our nation’s educators. Even with an MEP option, it’s imperative for employers and advisors to shop their options in order to evaluate the best service provider for their plan.
Annuity Provisions ( fail)
Here’s where it gets ugly. This provision pushes to continually offer annuities within a 401(k) plan as if the plan participants don’t have access to a lifetime income option anywhere else.
Almost every bank, insurance agent, broker dealer, and even RIA offer annuities. With so many different outlets available outside of a 401(k) to purchase an annuity, why would there be any justifiable need to build them into 401(k)s and waive fiduciary liability for the plan sponsors? This just seems irresponsible.
If participants in a 401(k) want to put their money into an annuity, there are no obstacles in their way and no shortage of opportunities for them to do so without having to build it onto their plan. Employees can set up an annuity in multiple situations: upon retirement from their company, if they quit working for their company, or when they turn 59 ½ while still working.
On the whole, employees would look to draw lifetime income after they no longer work, not while they’re still on the clock and saving for retirement. Something is amiss with forcing this into these plans. Not to mention, most 401(k)s at a plan level are already annuity platforms sold by insurance companies. The 401(k) industry doesn’t lack annuities, it actually needs far less of them.
I applaud Congress for addressing the retirement crisis and there are potential benefits to some of these provisions but more transparency and attention to detail is needed to ensure the best interest of employees is truly at the forefront of this legislation