Is Public Policy Reinventing Retirement? The SECURE Act offers clues.
Since the original employer-sponsored plans launched in the late 1970s, policy has powered retirement saving enhancements. Reviewing the past gives us cues for the future and context for the next wave of retirement reform, namely, the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019.
More than a decade has passed since the last major burst of retirement reform. The growth of automatic enrollment and target date funds transformed the way workers saved and invested for retirement. Since then, however, the innovation engine had idled. Before the May 2019 passage of the SECURE Act, in the House of Representatives, many wondered when policymakers would kick into gear to address the continued shortfall in retirement savings and income.
History reveals a clear pattern. All of the major bursts of retirement innovation — the birth of 401(k) plans in the ’70s, their rising popularity in the ’80s, the arrival of small business solutions in the ’90s, even the growth in catch-up savings — track directly to changes in public policy.The Pension Protection Act (PPA) is a perfect illustration, streamlining investor decision making with the approval of the set-it-and-forget-it target date fund as a qualified default investment alternative (QDIA) and propelling participation through auto enrollment. The effects on 401(k) savings have been dramatic, boosting assets from $3 trillion in 2007 to $5.2 trillion at the end of 2018.1,2
After a spate of new, PPA-era solutions, the pace of change slowed again, bringing a few modest improvements but leaving major needs still unaddressed. For example, while the PPA increased participation rates within DC plans, it did little to nothing to expand the total number of workers who can access such plans. At the end of 2013, only 51.2% of the private workforce in the United States was saving in DC plans, barely above the 50% participation rate in 2006.4 This is where we find ourselves today.
Major reforms ahead
If public policy is the engine of retirement innovation, then passage of the SECURE Act is a clear signal that the retirement industry and experience are revving toward powerfully positive change.
Reform now has bipartisan support. Congress is divided, but many important leadership positions — including the chairmanship of the House Ways and Means Committee — are now occupied by strong legislative advocates of retirement reform in both houses, representing both sides of the aisle. Retirement is rarely seen as a hot-button issue that drives voters to the polls, so it may offer more room for negotiation and compromise.
These elements were on display with the House’s overwhelming bi-partisan vote in support of the SECURE Act, with the Senate rumored to closely follow.
The demographics demand action. Ten thousand Baby Boomers will retire every day for the next decade, ultimately leaving nearly a fifth of the population dependent on retirement savings and income.5 A retirement income shortfall would have cascading effects on state and federal budgets, as well as on the economy as a whole.
Big change is in the air. Prior to SECURE Act passage, this year has marked the longest stretch of time without major reform since the enactment of ERISA in 1974. But the political mood is shifting. Incrementalism is out. Big, bold reforms have the momentum. In fact, we may be entering one of the most favorable times for reforming retirement policy in recent memory.
As long-time advocates of legislation pushing retirement system enhancements, State Street Global Advisors has been following the SECURE Act closely and has distilled the comprehensive bill into four key themes:
Opening up retirement plan access to small businesses and part-time workers via open multiple-employer plans (MEPs) and tax credits.
According to the Small Business Administration Office of Advocacy’s 2018 Small Business Profile, there are 30.2 million small businesses in America employing 58.9 million workers (47.5% of the working population).6 Many of these employers struggle to offer retirement benefits, often citing plan expense and limited administrative resources, leaving a significant slice of the workforce at a savings disadvantage.7 MEPs would enable small employers to band together to achieve economies of scale. In addition, the repeal of the “one bad apple” rule would mean that all organizations within the open MEP would not be penalized for a violation committed by a single employer, easing the liability for participation. Establishing long-term, part-time worker status will also afford access to those workers who historically have been left out.
Spurring saving by lifting the automatic escalation cap and extending the Required Minimum Distribution (RMD) age.
By increasing the cap on automatic escalation from 10% to 15%, employers are able to facilitate greater employee savings. For those employees seeking to work or save longer, the extended RMD age, from 70 ½ to 72 years of age, offers more flexibility and opportunity for investment accrual.
Expanding retirement spending with lifetime income and other options.
SECURE paves the way for fiduciary protections for employers, enhanced portability and additional income options. Many plan sponsors want to offer retirement income solutions, but worry about certifying an annuity provider’s financial strength decades down the road. SECURE shifts this liability to insurers, reducing the risk to employers.
Boosting financial literacy with lifetime income disclosures.
Employers will now be required to share a disclosure on employees’ benefit statements featuring participants’ projected monthly retirement income as a function of their savings to-date. By translating the saving experience into a future income stream, participants can better assess their retirement readiness and make changes accordingly.
The next generation of retirement
Over the past decade, the pace of new ideas has not kept up with the need to bolster retirement saving behaviors. With the passage of SECURE, a fresh wave of saving and spending enhancements is likely to follow — and employers, workers and providers all need to prepare for the evolved experience.
The great American retirement machine is difficult to push forward and even harder to steer, but recent public policy advances bode well for a retirement experience that is more aligned with and responsive to the continued changes in how we work and live.
1 Institutional Investor, “Ten Years After, the Pension Protection Act Falls Short of Promises,” August 17, 2016. https://www.institutionalinvestor.com/article/b14z9njr60b762/ten-years-after-the-pension-protection-act-falls-short-of-promises
2 Investment Company Institute, “How large are 401(k)s?,” December 31, 2018. https://www.ici.org/faqs/faq/401k/faqs_401k
3 Profit Sharing/401(k) Council of America, 2017.
4 Employee Benefit Research Institute as cited in Institutional Investor, “Ten Years After, the Pension Protection Act Falls Short of Promises ,” August 17, 2016. https://www.institutionalinvestor.com/article/b14z9njr60b762/ten-years-after-the-pension-protection-act-falls-short-of-promises
5 Pew Research Center, “Baby Boomers Approach 65—Glumly,” December 20, 2010. https://www.pewsocialtrends.org/2010/12/20/baby-boomers-approach-65-glumly/
6 Small Business Administration Office of Advocacy, “Small Business Profile“ 2018. https://www.sba.gov/sites/default/files/advocacy/2018-Small-Business-Profiles-US.pdf
7 Pew Charitable Trusts, “Small Business Views on Retirement Savings Plans, 2017. http://www.pewtrusts.org/~/media/assets/2017/01/small-business-survey-retirement-savings_f.pdf
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