SECURE Act moves to reality from long shot

Congress gave the retirement community a highly coveted gift just before the holiday recess in the form of a comprehensive retirement security package, which just weeks prior appeared doomed to legislative purgatory.

The Setting Every Community up for Retirement Enhancement Act of 2019, referred to as the SECURE Act, was attached Dec. 16 to a fiscal year 2020 appropriations bill that had a Dec. 20 deadline. With a deal worked out the previous weekend, lawmakers moved quickly to pass a $1.4 trillion spending package — the House approved it Dec. 17, the Senate Dec. 19, and the president, at press time, was expected to sign it into law.

Proponents of the SECURE Act applauded Congress' efforts, including Melissa Kahn, Washington-based managing director of retirement policy for State Street Global Advisors' defined contribution team, who said the legislation is a great victory for plan sponsors and American workers.

"It's been 13 years since we had major retirement legislation," she said, referencing the Pension Protection Act of 2006. "A lot of innovation has happened, a lot has changed among plan sponsors and participants and what they want, and I think this legislation addresses a lot of that innovation and the questions and issues that have come up.

The SECURE Act features wide-ranging provisions, including ones that make it easier for smaller employers to join multiple employer plans, ease non-discrimination rules for frozen defined benefit plans, increase the automatic-enrollment safe harbor cap to 15% from 10%, and allow long-term part-time workers to participate in 401(k) plans.

"It's a comprehensive retirement reform and modernization bill that's addressing issues that have been out there and improving the system at the same time," said Christopher Spence, senior director of federal government relations for TIAA-CREF in Washington.

Mr. Spence and those in the life insurance business are most excited about the bill's lifetime income-related provisions, of which there are three. The SECURE Act creates a stronger safe harbor for sponsors who choose to include a lifetime income investment option in their defined contribution plan by specifying the measures they need to take in selecting an insurer to comply with their fiduciary duties; lets participants more easily transfer their in-plan assets, including an annuity, to an individual retirement account without paying taxes on those amounts; and requires sponsors to provide participants with an annual lifetime income disclosure converting their account balance into an income stream at retirement.

"There's a recognition across the board that lifetime income products need to be built into 401(k) plans," Mr. Spence said.

Linda K. Stone, senior pension fellow at the Washington-based American Academy of Actuaries, said longevity risk is one of the biggest challenges in retirement. The academy supports the use of lifetime income options in defined contribution plans because they "reflect actuarial principles such as longevity risk pooling and institutional pricing in a cost-effective manner beyond what may be available to an individual," Ms. Stone said. "More predictable income can help retirees manage their financial security in retirement."

In the past, defined contribution plan sponsors have been hesitant to offer lifetime income options, like annuities, because they could be exposed to litigation if their provider became insolvent, Mr. Spence said. The safe harbor added in the SECURE Act will give sponsors peace of mind when they're choosing an annuity provider, he added.

Some plan sponsor groups, like the ERISA Industry Committee in Washington, take issue with bill's Lifetime Income Disclosure Act — the provision that stipulates plans must provide participants with an annual lifetime income disclosure converting their balances into a post-retirement income stream.

Aliya Robinson, senior vice president of retirement and compensation policy at ERIC, said the provision amounts to a mandate on employers and will only lead to mass confusion among participants. She said plan sponsors already provide tools, such as retirement calculators, that allow participants to enter individualized information and receive outcomes specific to them.

"ERIC strongly believes that plan sponsors should be able to continue providing this individualized information without having to also provide a generalized annuity disclosure that may or may not reflect the participants' actual realities," she said. "We look forward to working with Congress in the new year to provide this additional flexibility in the LIDA provision."

The LIDA provision will not go into effect until one year after the Department of Labor promulgates the regulation and issues a final rule, the SECURE Act instructs.

Edmund F. Murphy III, president and CEO of Empower Retirement in Denver, said while Empower supports lifetime income disclosures, the SECURE Act "does not take advantage of the latest technologies in arriving at the projection. A one-size-fits-all model will not work for all retirement savers."

The SECURE Act also makes it easier for smaller employers to join open multiple employer plans by removing the common nexus requirement and allows financial institutions to run an open MEP.

Brigen Winters, a principal at the Groom Law Group LLP in Washington, said the open MEP provision will provide more opportunities to small employers who do not have the bandwidth and benefits knowledge needed to offer a retirement plan of their own.

The provision "will allow small employers to offer meaningful retirement benefits to their employees and may also allow employers of all sizes to effectively outsource some of the more challenging aspects of maintaining a 401(k) plan (such as choosing the investment menu) to professionals, and help plan sponsors limit the risk of class-action lawsuits," said Joshua Lichtenstein, a New York-based partner at Ropes & Gray LLP, in a statement.

For individuals, the bill raises the age for required minimum IRA distributions to 72 from 70½. The provision will only affect people who turn 70½ starting in 2020.

The bill also includes a provision that reshapes the way IRAs are distributed to non-spouse beneficiaries upon the death of the account holder. Currently, beneficiaries can take distributions throughout their lifetimes, but the SECURE Act cuts the timeline to 10 years.

Prospects for passing the SECURE Act had diminished since it overwhelmingly passed in the House 417-3 in May. It then remained in a state of limbo in the Senate for six months. Three Republican senators — Pat Toomey of Pennsylvania, Ted Cruz of Texas, and Mike Lee of Utah — placed holds for varying reasons, blocking its passage via unanimous consent.

In November, Mr. Toomey proposed that the Senate consider the bill via unanimous consent along with five amendments apiece from Republicans and Democrats. Sen. Patty Murray, D-Wash., objected, insisting on voting on the House-passed version of the bill, and the attempt failed.

The SECURE Act was not attached to continuing resolutions that kept the government funded in September or November, weakening hopes it would become law.

"It had become clear throughout the summer and fall that the only way to get it enacted was to attach it to a larger must-pass spending bill," Mr. Winters said.