Defined contribution plan sponsors have some important decisions to make and opportunities to consider in the wake of enactment of the Setting Every Community Up for Retirement Enhancement (SECURE) Act at the end of last year. The act is intended to boost retirement financial security on several fronts.
Offering Safe Harbor for Annuities
The SECURE Act creates a safe harbor for sponsors that choose to offer life insurance company annuity products to plan participants. The purpose is to limit plan sponsors’ fiduciary liability should an annuity provider go bust long after the sponsor offered its products to employees.
To begin, employers must undertake “an objective, thorough, and analytical search for the purpose of identifying insurers from which to purchase” annuity contracts. Then, employers will be exempt from liability if they select an annuity provider that for the preceding seven years:
- Operated under a certificate of authority from the insurance commissioner of its state that hasn’t been revoked or suspended,
- Filed audited financial statements in accordance with the laws of its state under applicable statutory accounting principles,
- Maintained reserves that satisfy the statutory requirements of states where the insurer does business, and
- Isn’t operating under an order of supervision, rehabilitation or liquidation.
A fiduciary that satisfies the requirements under the act won’t be liable “following the distribution of any benefit, or the investment by or on behalf of a participant or beneficiary pursuant to the selected guaranteed retirement income contract, for any losses that may result to the participant or beneficiary due to an insurer’s inability to satisfy its financial obligations under the terms of such contract.” This safe harbor provision was effective on the date of enactment.
Promoting Lifetime Income
The act contains interrelated provisions that deal with lifetime income options for plan participants. Important changes include:
Transfers to IRAs. The SECURE Act streamlines procedures for participants to transfer their plan assets, including annuity contracts, to an IRA without triggering an immediate tax liability. The provision applies if the particular investment is no longer an authorized plan investment option. It’s effective for plan years beginning after December 31, 2019.
Annual disclosure of projected income. The act requires sponsors to furnish participants with generalized lifetime income “disclosure” statements annually projecting regular income that their plan assets could generate. Its effective date is one year after the Department of Labor issues regulations spelling out how those projections need to be made.
The lifetime income disclosure provision drew immediate fire from benefits lobbying groups. Generally, most sponsors already give participants access to flexible online forecasting tools that can generate projections based on various scenarios. Many industry groups believe the mandated disclosure could lead to confusion among participants by giving them data that doesn’t reflect participants’ actual reality.
Providing even more
Additional provisions of the SECURE Act:
- Provide for the creation of “Pooled Employer Plans” (PEPs), easing restrictions on multiple employer plans by allowing them to be sponsored by financial institutions and offered to employers without any common geography or industry category,
- Raise the safe harbor cap on auto-enrollment deferrals from 10% to 15%,
- Allow participants to take penalty-free distributions for expenses related to the birth or adoption of a child,
- Raise the daily penalty for filing a Form 5500 late from $25 to $250, with a maximum penalty of $150,000 (up from $15,000),
- Ban distribution of plan loans through savings plan credit cards, to discourage use of plan loans for routine purchases,
- Raise the age for required minimum distributions from 70½ to 72 for those individuals who were born on or after July 1, 1949,
- Eliminate “stretch IRAs,” which can create estate planning issues for those relying on the old rules,
- Eliminate the annual notice requirement for nonelective 401(k) safe harbor plans, and
- Allow participants to make IRA contributions after age 70½.
The SECURE Act gives sponsors some breathing room regarding adopting plan amendments to reflect the new law. Most plans will have until the end of 2022 to do so, though effective dates for its many provisions vary.
Time to Take Advantage
Additional, more narrowly applicable provisions of the SECURE Act aren’t included in this summary. Consult an ERISA attorney for a more complete briefing on all of the law’s provisions that may affect your plan.