SECURE Act Roundtable

The defined contribution industry is celebrating major legislation, the SECURE Act, that passed Congress in December 2019, moving the needle forward on retirement security for employees. The Setting Every Community Up for Retirement Enhancement Act encourages smaller employers to start plans and helps larger employers with fiduciary relief and plan features that nudge employees toward maximizing savings. Plan sponsors are diving into unpacking the act’s provisions, according to a panel of industry experts, including Rick Jones, senior partner, national practices, retirement solutions, at Aon; Matt Soifer, managing director and head of distribution in BlackRock’s Retirement Group; and Daniel Notto, ERISA strategist, retirement solutions, at J.P. Morgan Asset Management. In this roundtable discussion, the panelists highlight key provisions of the law, point out what plan sponsors should pay attention to and why, and predict which features will have the most lasting impact.

Pensions & Investments: Looking at the landscape of public policy around retirement since the Pension Protection Act of 2006, how significant is the SECURE Act?

Dan Notto: The SECURE Act is the most significant retirement legislation that we've seen in 13 years. We saw over time what the PPA did to encourage plan sponsors to add innovative provisions, such as the use of target-date funds, automatic enrollment and so on. The SECURE Act, in a couple of ways, could be significant as well. It has nice incentives to encourage small employers that currently don’t have plans to set them up. Also, the safe harbor for lifetime income will encourage more plan sponsors to think about adding lifetime income options to their plan menu.

Rick Jones: I agree with what Dan said. As we think back on the PPA, it was transformational in the defined benefit space, which brought the spotlight to pension funding and spurred another round of pension freezes, the pension settlements that we see today and derisking activity. We see the SECURE legislation being equally transformative for DC plans. The open multiple employer plans, or MEPs, enabled by the legislation will be attractive across many segments of the workforce and across organizations of different sizes. The lifetime income safe harbors and other provisions will be further embedded into DC plans and in MEPs, and there will be further automation of plans. All that will lead to better retirement outcomes for people over time as they get access to even more effective programs. That will be true across all employer shapes and sizes.

Matt Soifer: We also see the SECURE Act as the most meaningful piece of retirement legislation to be passed since the PPA in 2006. In our view, the three critical needs for strengthening the retirement system are expanding access to retirement plans, increasing participation in those plans and helping individuals achieve better retirement outcomes, which the lifetime income safe harbor is an important piece of. When we look at the SECURE Act, we can see that some of its features are ones that we, as a collective industry, have wanted to see for a really long time. So it's nice that it’s been recognized, formalized and pushed over the finish line here.

P&I: Among these highlights, what are the key areas that could have the biggest impact on improving retirement security?

Jones: We have some evidence that suggests that all sizes of plan sponsors are finding MEPs, pooled employer plans, to be attractive. In our discussions with clients, we find medium and large organizations, as well as smaller ones, are excited by it. Aon’s recent client webinar on the SECURE legislation also supports strong interest in open MEPs.

Notto: Yes, the provision regarding open MEPs is really significant. What Congress has done here is created the opportunity for a whole new type of retirement plan product that financial services organizations, record keepers, consultants and others, will be able to deliver to, as Rick points out, a wide range of clients. While it’s likely to be primarily of interest to the smaller employer, over time, the larger employer might find the idea of participating in a pooled employer plan to be attractive.

Soifer: The provisions around use of lifetime income products, whether that’s annuities or other forms of financial guarantees, are a big deal. The reasons for using lifetime income products align quite well with participants’ natural risk preferences, especially as a hedge to longevity. However, we do think that including such guarantees inside the [qualified default investment alternatives] is where they can have the strongest impact in driving adoption. People are already comfortable with QDIAs, such as target-date funds. That familiarity creates a real opportunity to help participants focus on the idea of building their guaranteed income over time to create a retirement “paycheck” once their regular paychecks stop.

We also agree that expanded use of open MEPs will help increase access to the retirement system over time. The provision that could possibly have the most immediate impact is a greater use of automatic enrollment and auto-escalation, increasing the safe harbor cap from 10% to 15%. This will have a material impact on outcomes and balances.

P&I: What are some plan features that you could see plan sponsors introducing as a result of the SECURE Act?

Soifer: The lifetime income disclosures are of great interest because, behaviorally, they can get people thinking not about how they can take a lump sum, but how they can actually spend throughout retirement. It goes back to what I said earlier about helping participants think in terms of replacing their paycheck once they retire by showing them how their money translates into what they can actually spend in retirement. It can be a strong call to action to see how much of their nondiscretionary expenses, like housing and food, might be covered and how much may be left for discretionary expenses. If you don’t like the monthly income number on your statement, hopefully that encourages you to save more. If it’s an attractive number, hopefully you are even more motivated to lean in and save more ― get serious about retirement planning.

Jones: Auto-escalation and the 15% target or maximum in the safe harbor in the SECURE Act, compared to the old 10%, will and should have an effect. Our research shows about two out of three American workers at large employers don’t appear to be prepared for continuing their standard of living after retirement. So it's important that accumulation of assets is part of the equation, and we think that safe harbor will be an important first step for many organizations.

Notto: I agree with the safe harbor for auto-escalation as having an impact. Another one is the safe harbor for lifetime income, which will accelerate a trend that we've been seeing to keep people and assets in the plan post-retirement. To do that, you need a viable way for those folks to get their money out of the plan during their retirement years. We think the safe harbor will prompt a lot more discussions about adapting the plan to provide various types of payout options.

P&I: The 15% target for auto-escalation could be difficult for many employees to reach, so how can plan sponsors start to move in that direction?

Jones: It gets back to communication and creating the awareness that these are healthy behaviors as part of financial well-being over a lifetime and accumulating assets is good practice at an individual and a collective level. The fact is that it is not a mandate, it’s steerage. We find people respond very well to steerage and view their employer as a source of authority or, at least, guidance on these issues. It’s a healthy tension between steering employees toward prudent savings behaviors, but not at the expense of some other near-term needs.

Notto: Rick’s point about communication is really spot on. The only thing I’d add is if the communication could include tools primarily to help people understand what it is likely to mean if I only contribute, say, 3% over time, in terms of how much retirement income I’d have at retirement, versus higher percentages like 10% or 15%. This would educate them about the importance of saving and encourage them to contribute more to their plan.

Soifer: One of the best exercises sponsors can do is to look at their employee base and understand, “How do my employees earn income? What is their income profile? How do they save? How do they invest?” Behaviorally, we know there are benefits to auto-enrolling people in plans at healthy rates, and auto-escalating them. We also know that employees will engage at points where they feel it's too much. By understanding their employee base and using analytical tools to understand the potential financial impact of raising the cap, they’ll have a better idea of how high they can raise the cap for their plan. Keep in mind that they’re not taking away their participant’s flexibility and choice. We know from experience and behavioral finance that when you raise the cap, people tend to stick with it and save more. But you’re not taking away the individual participant’s ability to change if it’s not right for them.

P&I: Do you think the SECURE Act’s provision for having lifetime income disclosures/statements can help demystify the complexity around annuities?

Notto: Again, communication is key. For example, some of the interesting guaranteed lifetime income products in the marketplace today can be complicated, so it’s really critical to help people understand how those options work. The SECURE Act says participant statements must include, based on the participant’s current account balance, an estimate of the monthly single or joint life annuity. It also requires the Department of Labor to provide model disclosures and guidance on the assumptions plans can use. Of course, it’s good to encourage people to start focusing on income at retirement rather than looking at their account balance today, but it also could be a double-edged sword. For a younger, new employee with a very low account balance, basing the lifetime income disclosure on her current account balance will show a very small monthly annuity. Could that be a disincentive to participants? We’re hoping the DOL guidance will allow projections of future contributions to be taken into account as well, so that the monthly annuity will not look so puny.

Soifer: I don’t think these lifetime income disclosures are going to demystify the complexity around annuities. For that to happen, you really need some help from the insurance companies who realize that annuities have historically been rather complex. Some are recognizing that simplicity is important and are looking into delivering that benefit in a way that’s easier to understand and to implement. The SECURE Act gives them extra incentive to get this right.

Jones: If you put a number of the SECURE Act’s provisions together — open MEPs, lifetime income safe harbors and those provisions, further automation — all those working together can lead to better solutions and better outcomes for people. The steerage toward lifetime income decision support tools will allow people to make the decisions around that. The SECURE Act has created a canvas, if you will, [so] that these provisions can be pulled together with great solutions in the marketplace and produce much better outcomes: Aon’s modeling shows a 15% to 20% or greater improvement in retirement outcomes.

I would add that the lifetime income disclosures are a good step, but by themselves won’t produce a significant change in behavior. It must be paired with innovative products offered within plans and some automation to steer or default participants into options that provide a more secure form of lifetime income. So the changes in behaviors will be based on, frankly, great plan design and great plan offerings that come together to ultimately produce great outcomes from a retirement-security perspective.

P&I: Many plan sponsors have been cautious about adopting more modern approaches to plan design, for fiduciary reasons or because of other concerns. Will the SECURE Act be a catalyst for plans to take bolder steps?

Soifer: It certainly should be. It gives plan sponsors comfort around some of the concepts, specifically around financial guarantees and insurance, that they’ve been looking for. Anytime something is new, it takes a while to get comfortable with. Look at target-date funds: pre-PPA, we had around $6 billion in target-date funds; now we have $300 billion all over the world. Initially, target-date funds were new, people were unsure about using [them], but at the end of the day, it was the right answer for the vast majority of folks. I think it will be similar with lifetime income and other financial guarantees. The more they familiarize themselves with lifetime income and the impact it can have on retirement, the more comfortable they will become with the concept. As for plan sponsors exploring what the act brings to their plan, we believe that being a good fiduciary means considering the modern approaches to plan design, to glidepath construction and better outcomes that align with what your participants need.

Notto: One way the SECURE Act could be a catalyst to take bolder steps would be the fiduciary safe harbor for lifetime income. Now that’s not a complete 100% safe harbor. It only protects fiduciaries in the event that the insurer that was selected to provide the in-plan annuity becomes insolvent or can’t honor its obligations under the annuity contract. The plan sponsor still has the fiduciary obligation to determine that the annuity is appropriate, in the best interest of participants and also that the fees are reasonable. The SECURE Act will prompt additional conversations about in-plan, lifetime income solutions — which could be a guaranteed product or some other type of product, like a managed payout fund or other market-based solution.

Also, the SECURE Act eliminates one of the obstacles for plan sponsors to include these guaranteed lifetime income products by allowing individuals to preserve their accrued benefit by transferring the investment to another plan or individual retirement account if the product is no longer available in the plan. For example, this could occur if the plan sponsor changes to a new record keeper that can’t support the product.

Jones: Yes, I would agree. During the Aon webinar on the SECURE Act for plan sponsors, one question we asked was why they would find open MEPs to be appealing. Of the four possible answers, the most popular one, cited by 37%, was the chance to further outsource responsibility, including fiduciary responsibility. The other three choices were greater access to retirement plan coverage; to gain greater scale via greater purchasing power and pooling assets to ultimately decrease fees; and the ability to further rely on experts.
The other thing I’d add is that lifetime income is not uncharted territory from the perspective of pension risk transfer in the defined benefit pension space. We, and others, help clients shift literally billions of dollars of retirement liability and annuity coverage from their plans to the insurance industry. There’s fiduciary obligation and expertise associated with that shift, as they select the safest available annuity provider. So the reliance on the insurance industry to help with retirement security is already in play in the broad retirement plan space for employers.

P&I: What are some initial concerns around the new act’s provisions you’re hearing from your plan sponsor clients?

Jones: There doesn’t seem to be anything that’s immediate for many organizations, and they’re seeing how the market evolves on some of these provisions. There will certainly be employers interested in adopting things sooner rather than later. But it will take a modest amount of time for these things to evolve and for the industry and plan sponsors to react to the SECURE Act. I feel it’s good that this can be done in a reasoned and a well-thought-through process.

Soifer: I’d say the biggest challenge or concern is education-related, specifically around the income piece. When you start to put new concepts in plans, you need to know the details. Education is important for comfort ― for sponsors, consultants and advisers ― and as I’ve said, the insurers and others in the DC community will help engage on education and product design. The record-keeping community clearly has a big job in front of it when it comes to building the technology for income solutions and other elements of the act, but I’m confident they can and want to do it.

Notto: Well, of course it’s all fairly new to them. But one question I’ve heard from a number of DC plan sponsors is around the penalty-free withdrawals in connection with the birth or adoption of a child. The SECURE Act allows individuals to withdraw up to $5,000 from their retirement accounts for such events, without being subject to the 10% early withdrawal penalty. Many sponsors are taking a wait-and-see approach while assessing whether their participants will be interested in this feature.

And one of the few actual mandatory provisions imposed on 401(k) plan sponsors under the SECURE Act is the provision to allow long-term part-time employees to participate in the plan. This provision doesn’t kick in for a few years. But still, employers need to make sure their payroll or HR systems can track this category of employee to eventually allow them to participate in the plan. Employers will not have to make contributions for this cohort, and they can exclude them for nondiscrimination testing purposes.

P&I: What are some considerations for plan sponsors around timing and impact of the lifetime income provisions?

Notto: All those provisions are in effect now, except for the participant statement disclosure that won’t be effective until 12 months after the DOL issues guidance. For the plan sponsor who wants to take advantage of the safe harbor for annuity selection, they have to go through some steps, get written representations from the insurer, vet them carefully and then consider all the areas that the fiduciary safe harbor doesn’t protect, such as ‘are the fees reasonable?’ While there will be quite a bit of activity by plan sponsors examining these provisions, it’ll probably take a while before we see many of them actually introduce these products, given the amount of due diligence that a prudent fiduciary would be required to engage in.

Jones: At Aon’s client webinar, the second polling question we asked was, ‘What aspect of the new legislation do you think will have the greatest impact on retirement programs in the next five years?’ The five potential answers were open MEPS, nondiscrimination testing relief, plan design changes, lifetime income and other. Of those five, lifetime income was the most popular choice, at 43%, almost half of the plan sponsors at our webinar. So they are very interested in it, which is gratifying, frankly.

P&I: What are some of the implementation challenges for open MEPs to come to market?

Soifer: Over the next 12 months, the DC ecosystem — record keepers, asset managers, consultants and advisers — will do a lot of work internally to figure out how they want to operate within an open MEP framework. Do they want to be the pooled plan provider, which functions as the plan administrator and named fiduciary of the MEP? Do they just focus on certain elements within the MEP? People want more clarity on open MEPs, including from the Department of Labor, on the roles and responsibilities, and how they discharge their fiduciary duties. Currently, we have HR outsourcing organizations that have MEPs, and it'll be interesting to see if they want to branch out even further.

Notto: This provision doesn’t kick in until 2021; so, by law, we have almost a year before it becomes effective. In the interim, providers will be putting together strategic alliances that package all the things required to operate a DC plan under this MEP arrangement. Some firms have already been thinking about this and perhaps lining up potential partners, so we expect they will be ready right out of the gate when 2021 rolls around to offer this in the marketplace.

Jones: We agree that this is a great opportunity for different constituents and parties to help improve retirement security.

P&I: Looking 10 years out, what do you predict will be the most consequential change delivered by the Secure Act?

Notto: Ten years from now, when we look back, the open multiple employer plan provision and the measures to promote lifetime income out of defined contribution plans are probably the provisions of the SECURE Act that will have had the greatest impact on retirement plan coverage and the future retirement security of Americans.

Jones: I couldn't agree more. And what will that lead to? It will lead to better retirement outcomes. Our modeling suggests that a best practice plan design leveraging the provisions of SECURE can improve retirement outcomes 15% to 20% or more over a career. That’s pretty significant. And we're not assuming that there are any more dollars feeding the system — that estimate is purely on a dollar-for-dollar basis. So from an outcome perspective, it’s 15% to 20% or more upside, based on all the modeling that we’ve done.

If you put all the different provisions together — open MEPs, lifetime income and all the different aspects of this act — we just stand in a great spot to enhance retirement security for the third of Americans who aren’t covered by the private sector employer-sponsored system right now and for the two-thirds that are covered. So again, it is wonderful legislation because it can be so effective. One plus one can literally equal three because these things can work together to produce just wonderful outcomes.

Soifer: Access and outcomes is how I would think about it. The SECURE Act will provide access to smaller employers who really need help on the administrative side, to operate at scale in a cost-effective manner. In addition, a big part of what drives outcomes is savings, so expanding the auto-enrollment cap up to the safe harbor at 15% should be a big help.

And I’d add that we’re already thinking about what we’d like to see in a future “SECURE Act 2.0” or additional retirement legislation. For example, we’d like to give individuals more choice in investment vehicles in their retirement plan. While 401(k) plans offer mutual funds and collective investment trusts, 403(b) plans cannot offer CITs, and it would be beneficial to be more vehicle-agnostic across types of plans with similar goals. Another would be to enhance provisions that enable people to save more in certain kinds of plans, such as IRAs that currently have a low savings cap. We can do more to find the right balance so people can save more if the IRA is their only choice, for instance, if they are defaulted into a state-sponsored IRA. We’re encouraged that the SECURE Act shows legislative willingness to encourage innovation in retirement plans. ■