Key provisions of the SECURE Act could reduce the U.S. retirement deficit by 3% or $115 billion for households between 35-64, according to a new study by the Employee Benefit Research Institute (EBRI).
For workers currently age 35-39, the percentage reduction increases to 5.3%, and further increases to 10.7% if they work for small employers (less than 100 employees).
The Issue Brief, “Impact of the SECURE Act on Retirement Income Adequacy,” uses EBRI’s Retirement Security Projection Model (RSPM) to evaluate the impact of provisions in the SECURE Act on retirement income adequacy on a national basis, including greater access by allowing providers to offer Open Multiple Employer Plans (MEPs), raising the cap under which plan sponsors can automatically enroll workers in “safe harbor” 401k plans from 10% to 15% of wages, and the new requirement to offer retirement plans for long-term part-time employees.
EBRI analyzed the impact of these provisions, by themselves and in combination with others, to provide a quantitative estimate on the impact on retirement income adequacy. This effect is measured by changes in the average simulated retirement savings deficits and surpluses.
EBRI’s RSPM simulates retirement income adequacy for all U.S. households between the ages of 35 and 64. The model reflects the real-world behavior of 27 million 401k participants, as well as 20 million individuals with IRAs.
Smaller employer, greater deficit reduction
The percent reductions in retirement savings deficits aggregated across all age groups would be greater for employees working for smaller employers: 5.6% for employers with less than 100 employees and 5.2% for those with 100 to 500 employees.
The households of young workers, currently ages 35-39, will have more time to benefit from these new provisions and their retirement savings deficit reductions are significantly greater—5.3% for all employer sizes combined, 10.7% for those with less than 100 employees and 8.6% for those with 100-500 employees.
“It is important to note that any analysis focusing exclusively on retirement savings deficits is limited to households who are expected to run short of money in retirement. Therefore, we also look at retirement savings surplus to better understand the full impact of the new legislation,” said Jack VanDerhei, Director of Research, EBRI, and author of the report.
Overall, EBRI finds that when all three SECURE provisions are included with baseline assumptions on Open MEP take-up rates and participation rates, the retirement savings surplus would have an overall increase of 5.9%. As expected, the percent increases in retirement savings surplus (aggregated across all age cohorts) would be larger for employees working for smaller employers: 8.9% for employers with less than 100 employees and 7.8% for those with between 100 and 500 employees.
The youngest cohort (those currently ages 35-39) will have more time to benefit from these new provisions and their retirement savings surplus increases are significantly greater: 14.4% for all employer sizes combined, 20.5% for those with less than 100 employees and 16.3% for those with 100-500 employees.
The impact of auto portability
Lack of coverage is of course not the only consideration in determining how well workers will fare in America’s retirement savings system, VanDerhei notes in the Issue Brief.
Studies have found that plan leakage through cashouts upon termination is another key variable in determining retirement savings outcomes, especially among workers with low plan balances. Auto portability seeks to address retirement plan cashouts by having terminated participants’ former employer accounts automatically combine with their active accounts in new employers’ plans.
Where open MEPs are available, the cap on the automatic escalation of contributions in the 401k testing safe harbor is 15%, long-term part-time employees are covered, and non-participation rates are 25% of eligible employees; further assuming that, upon termination, participants would have auto portability, the overall reduction in retirement savings shortfalls is 10.0%.
EBRI plans to publish at least two additional Issue Briefs on the impact of the SECURE Act. The next one will look at the impact of these provisions on assets under management for the next 10 years under a series of sensitivity analyses. A third Issue Brief will be published on the likely take-up of in-plan annuity options by employers and employees.
The full Issue Brief, “Impact of the SECURE Act on Retirement Income Adequacy,” is available at ebri.org.