The SECURE Act: What it is and why it matters

December 23, 2019

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Jerry Golden

Jerry Golden

Efforts to reform aspects of the U.S. retirement system have led to legislation, known as the Setting Every Community Up for Retirement Enhancement (SECURE) Act, which President Trump signed into law on December 20, 2019. According to Jerry Golden, Vanguard Government Relations principal and head of US Congressional Affairs, the SECURE Act will impact employer-sponsored retirement plans by increasing retirement savings levels and improving plan administration.

While there are parts of the law that Vanguard did not support, "We support many provisions of the Act," Mr. Golden said. "We enthusiastically support those that help investors achieve retirement security, including improved access to currently underserved employees, streamlined plan administration that can reduce the costs for investors, and incentives that encourage investors to save more."

We've compiled a list summarizing the key provisions of the Act to help plan sponsors better understand how their plans will be affected.

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Retirement savings incentives

Previous law required that most individuals begin to take annual required minimum distributions from their retirement accounts when they reached the age of 70½. The SECURE Act delays this requirement to age 72, allowing investors to save longer before having to take withdrawals. (Individuals that are still working beyond age 72 are still permitted to delay taking required minimum distributions from most employer -sponsored retirement plans until after they retire.)

The SECURE Act also repeals the maximum age for traditional IRA contributions. Previously, this age limit was 70½ years old. Repealing the limit allows workers to save longer for retirement, even after withdrawals begin.

The SECURE Act allows employers to raise the cap on automatic deferral rate increases from 10% to 15% for employees who are autoenrolled in their plans. "Two-thirds of Vanguard recordkept plans that have an automatic enrollment feature have implemented automatic deferral rate increases," Mr. Golden said. "Automatic escalation can substantially increase retirement saving rates by encouraging investors to save at higher levels. We would expect the increase in the cap to allow a greater number of investors to save significantly more over time and be better prepared when they retire."

Easing small employers' ability to offer plans

The SECURE Act provides several incentives for small employers to offer plans. Those with fewer than 100 employees are eligible for a 50% tax credit for retirement plan startup costs as high as $5,000, a significant increase from the previous cap of $500. In addition, small employers will receive a credit of up to $500 a year for up to three years for including automatic enrollment in their plans.

The Act also includes a provision that allows employers to join together in multiple-employer plans (MEPs). These arrangements allow small firms to enjoy economies of scale that could reduce administrative and compliance costs and burdens while increasing their negotiating power with providers. "Allowing open MEPs is an effort to reach more workers whose employers otherwise wouldn't provide plans," Mr. Golden said.

Increasing the availability of annuities in retirement plans

The SECURE Act makes it easier for sponsors to offer annuities, as plans will now have a safe harbor from liability if annuity providers go out of business or stop making payments. The new law also allows lifetime income investments to be transferred among retirement plans when the option is no longer authorized by the original plan.

While Vanguard has not opposed these two annuity-related measures, we do have reservations about another provision that requires lump sums to be translated to an annuity payment amount on retirement plan statements. "Most plans don't offer annuities, and even most insurers don't advise annuitizing your entire lump sum," Mr. Golden said. "We strongly support providing participants with a better understanding of lump sums, but we would prefer more leeway to use different approaches to estimate retirement income that can better reflect participant needs and allow room for ongoing marketplace innovation."

Other provisions of interest to retirement savers

Other important provisions in the SECURE Act include the effective elimination of "stretch" distributions from IRAs as well as employer-sponsored plans and changes to 529 college savings plans.

To make up for lost tax revenue, the Act requires most individuals who inherit an IRA or employer-sponsored plan to withdraw the money and pay any taxes due within ten years of the account owner's death. Some types of beneficiaries, including surviving spouses, minor children, and certain others are still excluded from the new 10-year payout rule. Previously, most heirs could spend down, or "stretch," inherited IRA accounts or employer-sponsored plans over their lifetime.

The legislation allows 529 plans to be used to pay for apprenticeship program expenses, and as much as $10,000 over a person's lifetime can be used for student loan payments.

Despite reservations, Mr. Golden said that the SECURE Act features much to celebrate, and he applauds Congress for focusing on retirement savings issues.

"While this law is far from perfect and we hope it is merely a starting point for additional retirement savings legislation, we're excited about the provisions that improve savings opportunities, such as increasing the age of required retirement account distributions, raising the cap on automatic escalation, improving tax credits for small businesses offering plans, expanding multiple-employer plans, and streamlining the rules for safe harbor plans," he said. "We're eager to work with Congress on bold bipartisan efforts to build upon the momentum of those provisions."

When some key provisions of the SECURE Act go into effect

Effective immediately

  • Changes to 529 plans
  • Annuity safe harbor

Effective in 2020

  • Increased mandatory RMD age
  • Contributions to traditional IRAs after age 70½
  • Increased limit on automatic escalation
  • Increases in tax credits for small employers
  • Portability of lifetime income investments
  • Inherited IRA provision

Effective later

  • Open MEPs are effective in 2021
  • Lifetime income disclosure mandate is effective 12 months after the Department of Labor finalizes the rules

Source: Vanguard, 2019.

Notes:

  • All investing is subject to risk, including the possible loss of the money you invest.
  • We recommend that you consult a tax or financial advisor about your individual situation.