What You Need to Communicate About the SECURE Act

It may seem like a million years ago, but back in December 2019 Congress passed significant retirement legislation called the Setting Every Community Up for Retirement Enhancement (SECURE) Act. Intended to provide more Americans with access to retirement savings plans, as well as strengthen Americans’ retirement readiness and simplify plan administration, this bill is the most comprehensive retirement legislation since the Pension Protection Act (PPA) in 2006. (Don’t recall the PPA? Many of the current plan design features that are common in defined contribution (DC) plans—including automatic enrollment into qualified default investment alternatives (QDIAs) and auto escalation—were made possible by that legislation.) 

While there has been a lot of analysis of the SECURE Act, including its provisions and potential impact on the overall state of Americans’ retirement security, we’re highlighting important takeaways to communicate with your people. For more details about the Act itself, including important DC and defined benefit plan rule changes, we recommend you refer to our compliance update.   

Changes to how participants can access their savings

Three of the provisions within the SECURE Act concern how participants access their savings.

• The age participants must begin taking required minimum distributions (RMDs) has been delayed to 72 instead of 70½.  
• The period of time that beneficiaries can take death benefits, i.e., distributions from defined contribution plans, is generally limited to 10 years following the death of the account holder (though some exceptions apply).
• DC plans can now offer penalty-free in-service withdrawals up to $5,000 for participants who give birth to or adopt a child. This withdrawal must be taken within one year of the child’s birth or adoption and is not subject to the 10% early withdrawal tax.

What you need to know for your communications 

If you haven’t done so already, you’ll need to update your plan information immediately if you reference RMDs and death benefits.

It’s still unclear whether the provision allowing participants to withdraw savings for the birth or adoption of a child is optional for plan sponsors to adopt. It’s also unclear how this will work for families who have multiple children at once (such as twins) or have more than one child within one year. Because plan sponsors are looking for more clarity on how this provision will be administered, many plans are waiting to introduce it to participants until further guidance is issued from the IRS and Treasury Department. When more is known about how this provision will work in practice, it will add an interesting dimension to retirement savings plans. Allowing families with young children to take these distributions may entice more engagement with retirement planning at an earlier point for participants who anticipate this life stage. But plans may also want to effectively explain the tradeoffs that participants will face between taking withdrawals to support their growing families and the long-term financial consequences to their nest eggs. All of this will require robust education and communication. 

Changes to eligibility and enrollment

Mandatory participation for long-term part-time employees
One important change mandated by the SECURE Act requires employers to allow certain part-time employees to participate in the 401(k) beginning in 2021, though matching contributions will not be required. To be eligible, participants must work 500 hours for 3 consecutive 12-month periods and be age 21 or older. This change does not apply to employees covered by a collective bargaining agreement or to governmental plans.

Cap on auto-enrollment raised to 15%
Effective immediately, plan sponsors can now auto-increase employees to a savings rate up to 15% of their annual salary. Previously, this cap was 10% annually. However, plan sponsors can’t enroll participants above 10% in their first year of eligibility.

What you need to know for your communications 

You'll need to allow participation in the 401(k) plan for your part-time employees who meet the requirements described above, however, you have some time until you need to do so.

The decision to auto-escalate your participants’ savings rates is optional and may depend on your plan demographics. Is stretching their savings rates feasible? You may want to do more analysis with your investment consultant on how higher contribution rates could impact opt-out rates. Communicate any changes you make and promote the value of auto-escalation. 

Changes to disclosures 

Lifetime income disclosure is another significant mandatory change for plan sponsors. You’ll need to provide your participants with annual statements that project how their current DC balances translate into annual income in retirement. As this provision requires a set of assumptions to be made for the income projection, it will not be effective until 12 months after the Secretary of Labor issues more guidance about the assumptions and model language.

What you need to know for your communications 

Lifetime income is an important—and complicated—concept. The intention behind this change is to help participants understand how the contributions they make now translate to income in retirement, giving them better insight into how their savings rates impact their retirement income. Research suggests that participants who receive income projections are more likely to increase their savings rates.

While the Department of Labor will provide a template for the lifetime income disclosures, participants will likely need additional support interpreting what these projections mean for them. You may need to explain why participants are receiving these disclosures, how the disclosures are meant to help them plan better for retirement, and what actions participants can take to improve the monthly income their balance would yield in retirement.

Longer-term communications impacts

There are many other interesting changes that could result from the SECURE Act, including pooled retirement plans where plan sponsors could band together and offer defined contribution plans to participants who work for several different organizations (these have been referred to as open multiple employer plans or MEPs and, more recently, as pooled employer plans or PEPs). This provision was intended to help smaller businesses join forces and offer competitive retirement benefits; however, it’s possible that some larger employers may see PEPs as a way to manage fiduciary risk. The SECURE Act also provides a new safe harbor to plan sponsors who offer lifetime income options, such as annuities, in DC plans. This could spur innovation in the types of products offered in DC plans, which would require new communications to help people decide if these products are right for them.

Keep in mind that any retirement plan changes are an opportunity to inform participants, reiterate the value of your plan, and inspire people to take action to improve their retirement readiness. And the biggest opportunity—and, sadly, the biggest miss—in retirement change communications is helping your people understand why you’re making a change and what it means for them. The more you share about why retirement planning matters and how you’re making it easier for more people to save at higher rates, the more likely it is that your participants will get the message—and appreciate your benefits in return.