Understanding the SECURE Act
The Setting Every Community Up for Retirement Enhancement Act (SECURE Act) was enacted into law by the President on Friday, December 20, 2019.
The SECURE Act seeks to expand and modernize the defined contribution (DC) retirement plan system. The legislation introduces sweeping changes including, but not limited to:
- Establishing open multiple employer plans (Open MEPs) aimed at providing retirement benefits toemployees of small employers;
- Expanding access to annuities in retirement plans through a fiduciary safe harbor;
- Increasing the age at which required minimum distributions must be taken from retirement accounts to 72 from 70 ½;
- Repealing the age limit for IRA contributions; and
- Enhancing certain retirement plan features such as automatic enrollment and auto-escalation.
The safe harbor provisions are particularly impactful to LGIMA’s efforts in DC innovation. The SECURE Act creates a fiduciary safe harbor that employers may use when they are choosing group annuity issuers to support 401(k) plan lifetime income stream options. The provision’s goal is to help alleviate and relax the potential fiduciary liability employers have in reviewing annuity providers and will effectively ease the burdens of offering annuities to plan participants. Plan fiduciaries will not be required to select the lowest cost product for their plans, but can meet their fiduciary obligation by selecting an annuity provider that is in good standing with state regulators. It bears noting there are stipulations on the use and the type of annuities suitable under the safe harbor. Specifically, the SECURE Act addresses changes to stretch distributions and introduces grandfathering of certain existing annuity contracts.
How this impacts our clients
The SECURE Act is a key piece of legislation that supports our DC strategy, which is focused on delivering a comprehensive income solution framework pairing investment-only solutions with guaranteed income solutions. Working closely with our other internal business units, namely the institutional annuity business (Legal & General Retirement) and our retail annuity business (Legal & General Retail Retirement), we are developing a modular income framework that will allow for individuals and plan sponsors to combine flexible income with annuities. By combining our broader capabilities we will be able to deliver more optimal retirement income solutions for retirees looking to protect themselves from running out of money while also having confidence to spend in retirement as their needs evolve. Supporting our income framework the SECURE Act will aid in the adoption of income as a standard via the following provisions:
- DC plans will be required to provide income illustrations, helping participants understand how much monthly income they may expect at retirement based upon their current balances and projected future growth in their retirement account.
- As alluded to above, an annuity safe harbor provisions should accelerate the adoption of Qualified Longevity Annuity Contracts (‘QLACs’) within employer-sponsored DC plans (e.g., 401(k)).
In addition to providing support for the adoption of an income-focused approach to DC, the SECURE Act also facilitates wider spread adoption of retirement plans for smaller employers. According to the US Bureau of Labor Statistics1, roughly 33% of American workers do not have access to a retirement plan at their current employer. Open MEPs will allow employers ease of adopting and providing a retirement plan to their employees. Open MEPs will likely grow in size and offer economies of scale to the employer via the outsourcing of administration and investment selection. In addition, MEPs should be focused on full retention of the employee to and through retirement, further supporting adoption of retirement income solutions.
The SECURE Act will be the first major piece of retirement legislation since the passage of the Pension Protection Act in 2006. It is a substantial piece of legislation for the retirement plan industry that is an important step to help people retire confidently. LGIMA (and really L&G more broadly) is well positioned for the transition to an income-focused DC plan market, where our heritage as an income provider should resonate. More importantly, it will provide an opportunity for us to continue to be able to help people achieve their long-term financial goals, making a difference in their lives, in our industry and in the wider community.
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1 US Bureau of Labor Statistics’ March 2019 National Compensation Survey
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