The SECURE Act was passed and signed into law December 2019 with a rare degree of bi-partisan support. Barbara Novick, Vice Chairman at BlackRock, called the legislation “our greatest opportunity in a decade to improve retirement security for millions of Americans.”
An individual investor glancing at the occasionally arcane provisions of the Act may be forgiven for wondering: why the excitement? What does it mean for me? To help make sense of the legislation, we answer some key questions about the implications of the passage of the SECURE Act – with a particular focus on workplace retirement plans.
How can public policy be used to improve retirement security?
It’s increasingly up to individuals to save for retirement, but when we step back a bit, we can see that this is also a public issue. Over a third of Americans don’t have access to a public or private employer-sponsored plan, and that number is even higher for individuals who work for small businesses.1 There’s a big swath of Americans who solely rely on Social Security to support their retirement.
There are numerous policy levers that can be used to give more people access to retirement plans and encourage people who do have access to plans to get started early and save more.
Why is the Act so symbolically important for retirement security?
It is encouraging to see legislators coming together in a bipartisan way and responding to needs that concern millions of Americans, including greater access to retirement plans and help generating sustainable income in retirement.
What has the SECURE Act done to improve access?
As mentioned earlier, significant numbers of people work for businesses that do not offer plans. While small business employees without a workplace plan may be able to save in an Individual Retirement Account (IRA), having a workplace plan may make it easier to save through payroll deductions, and allows employees to save up to a higher limit.
The SECURE Act does several things to help. First, it offers tax incentives to small businesses establishing a plan, and second, allows a wider range of small employers to band together in a Multi-Employer Plan (MEP), which may reduce administrative burdens and fees. Even for small employers currently offering a plan, joining a MEP may enable them to deliver some of the benefits enjoyed by larger plans.
Separately, the Act also extends access to many long-term part-time workers, who were previously excluded. You should check with your employer if you have questions about plan access.
What has the Act done to help improve access to income in retirement?
It is very difficult for an individual to turn their savings into a sustainable stream of retirement income. In addition to the risk of market losses, many simply have no reliable way of estimating how long they will need income. The risk of spending their savings too quickly is real, as is the risk of being too cautious and not enjoying their savings as much as possible.
Annuitizing a portion of your savings can address longevity risk and shift market risk to an insurance company. Recognizing this, many employers would like to provide a guaranteed income option. The SECURE Act helps them do this by establishing clear criteria for selecting an income provider and providing “safe harbor” protection, which limits the employer’s liability around the claims paying ability of the annuity provider if the provider meets certain criteria.
This may sound obscure, but we believe it makes it easier for workplace retirement plans to include income options - which gives the plan’s participants more choice when it comes to managing their retirement spending.
Does the Act help encourage plan participants to take advantage of income?
The Act mandates that retirement account statements provide an income conversion for current savings. This will help in two ways. First, it will help participants think about their savings in terms of the retirement income they can expect. Second, it will give them the information they need while there is still time to increase savings or decide to delay retirement.
For example, let's say a 65-year-old has worked hard and saved, and is proud to have been able to save $200,000, which is a lot of money. Then she looks at annuitizing and has a “holy cow!” moment when she sees that this sum is going to provide (for example) a little more than $8,400 a year.2
If plan participants have insight into their income earlier, they can work toward an income target and have clarity into what kind of retirement income they can expect in addition to Social Security.
What else could result from the SECURE Act?
The passage of the Act, and momentum on retirement income in particular, could create a culture shift from thinking of retirement in terms of savings to thinking about it in terms of spending – and how, at retirement, lifetime income can help individuals manage spending more efficiently.
Most people with a workplace plan will likely retire with a combination of Social Security payments and a variable amount of income taken from their savings. The combination of the lifetime income safe harbor and requirement that plans provide an estimate of how a participant’s savings could translate into annual income may help nudge individuals to think about how to balance the optimal layers of income – Social Security, a portion of guaranteed income, and income drawn from savings.
