Big changes are coming to 401(k) plans in 2020 thanks to last week’s whirlwind passage of the SECURE Act as part of the broader federal government spending bill.
Among the most significant changes are provisions focused on making it easier to include annuities in 401k plans and opening up multiple employer plans (MEPs) to small companies that don’t share a common nexus.
Industry subject matter experts have been quick to speak out on what these changes mean – and what advisors need to be focused on right now as the SECURE Act becomes law in a matter of days.
Here we take a closer look at what the experts had to tell 401(k) Specialist about the annuity and Open MEP provisions, while we’ll tackle additional provisions in upcoming coverage.
Annuities
Though commonly offered by traditional pension plans, annuities to this point have been offered in less than 10% of 401(k) plans. Vanguard, for example, says annuities are currently available in only 8% of the 401ks it administers.
One of the biggest changes in the SECURE Act is a provision that provides fiduciary safe harbor to 401k plan sponsors who include annuities among offerings to plan participants, granting access to the market that insurance and financial services companies have long craved.
“As people live longer and spend more years in retirement, they need ways to tap into lifetime income solutions. This bill will expand access of guaranteed income solutions for America’s workers within workforce plans,” says Sri Reddy, senior vice president at Principal, who also serves as the chair of the ERISA Advisory Council.
“We anticipate that, with the enactment of SECURE, the market will begin to advance significantly over the next few years,” says State Street Global Advisors Managing Director for Retirement Policy, Melissa Kahn. “Financial services companies have been working on new product designs for a number of years and some, including State Street Global Advisors, have already brought such products to market.”
The lifetime income changes included in SECURE will be another avenue for advisors to connect with their employer clients, Kahn adds. “Although not appropriate for all employers to offer or all employees to invest all their assets in, guaranteed lifetime income options will be appropriate for many employees to invest some of their retirement assets in order to ensure that they have some guaranteed lifetime income in addition to Social Security benefits.
She notes that advisors will be well positioned to assist their plan sponsor clients in navigating the annuity landscape and helping them choose the best annuity to offer to their participants as well as educating employees about the value that annuities can bring.
“The first item on any advisor’s to-do list is to start talking to your clients about integrating guaranteed lifetime income products into their plans, if they haven’t done so already,” says TIAA Senior Director, Federal Government Relations Chris Spence. “There are three provisions in the bill specifically aimed at ensuring that plan sponsors can easily integrate annuities into their plans, including a new annuity provider selection safe harbor that goes into effect the minute the bill becomes law. I think this provision represents the biggest improvement to the retirement system and will help to modernize it.”
Noting that the SECURE Act’s annuity safe harbor provision has been in the works for years, Eric Stevenson, President, Nationwide Retirement Plans, says annuity solutions designed specifically for retirement plans have been available for quite some time, but adds the new provisions should make it more attractive for plan sponsors and participants to include annuities in their 401ks.
“The demand from workers for protected lifetime income is strong, so we anticipate that it won’t take long for companies to continue offering annuity products specifically designed for retirement plan inclusion to help Americans better save and protect their retirement,” Stevenson says.
Another annuity-related provision is the requirement that lifetime income estimates be included on annual defined contribution (DC) plan benefit statements, intended to help employees gain a better understanding of how their retirement plan savings will translate into retirement income.
But don’t expect everyone is going to jump in right away and be comfortable offering annuity products in 401ks. With the wave of lawsuits over 401k fees and breaches of fiduciary duty, many think plan sponsors will take a cautious approach to adding annuities to their 401k plans.
Open MEPs
The SECURE Act’s Open Multiple Employers Plan (MEP) provision will make it easier and more economical for smaller employers to offer retirement plans by allowing for the creation of pooled retirement plan providers.
MEPs are allowed now, but only for businesses with a relationship such as a common owner. The SECURE Act does away with that restriction.
“For a smaller employer, there can often be many barriers to entry for a retirement plan. This includes complexity, fiduciary liability and cost. In our minds, the SECURE Act has an opportunity to help solve for these concerns,” says Bill Harmon, president, Retirement Corporate Markets at Voya. “We’re excited to see an increase in the opportunity for small companies banding together to join open multiple employer plans, thus potentially lowering expenses for participating plan sponsors and providing greater access to a 401k or similar workplace retirement savings plan to more individuals.”
Andrew Kligerman, an analyst who follows the life insurance industry at Credit Suisse, told The Wall Street Journal recently he expects the change “to expand the $5.84 trillion 401k market by $1 trillion within about five years.”
Think that’s something that might interest 401k-focused advisors?
“On a going-forward basis, one of the most important changes to the retirement landscape will be the momentum behind ‘open’ multiple employer plans and the accompanying tax credit changes. Taken together, we believe that advisors will be able to offer small employers the ability to provide a retirement plan to their workers in a much more cost and administratively efficient manner,” says State Street’s Kahn. “Financial advisors will be the gateway to open MEPs, as much education will need to be done for these small employers. Advisors will also be the ones to guide employers in choosing the MEP that is best for them. And the increased start-up tax credits, coupled with the automatic enrollment tax credits, will make providing these benefits very attractive.”
As with annuity products, Kahn says many in the financial services industry have been working on open MEP solutions for many years. “Some companies have already announced open MEP partnerships and we expect that activity to accelerate with the passage of SECURE. Although it will not happen overnight, we do expect to see small companies moving into open MEPS over the next 3-5 years.”
Nationwide’s Stevenson says the Open MEPs provision builds the foundation of this new system, adds that further regulations are needed to outline administrative duties and a model plan design. “The shape of those regulations will be critical to the success or failure of the new pooled plan design,” Stevenson says.
Steve Parrish, Co-Director of the Retirement Income Center at The American College of Financial Services, agrees.
“The unknown is whether small companies will avail themselves of MEP liberalization,” Parrish says. “Both Simplified Employee Pensions (SEPs) and Savings Incentive Match Plan for Employees Individual Retirement Accounts (SIMPLEs) have failed to spur small business retirement plans. Much of this depends on how the Internal Revenue Service crafts regulations to support this law.”
Veteran financial services industry journalist Brian Anderson joined 401(k) Specialist as Managing Editor in January 2019. He has led editorial content for a variety of well-known properties including Insurance Forums, Life Insurance Selling, National Underwriter Life & Health, and Senior Market Advisor. He has always maintained a focus on providing readers with timely, useful information intended to help them build their business.
