Plan sponsors are facing numerous potential regulatory changes between the SECURE Act and the CARES Act provisions.
I asked several industry experts for their advice on how sponsors should be proceeding in an era of new regulations, economic upheaval and challenging work conditions.
Senior Vice President, Compensation and Benefits Policy Research
Recent legislation has revealed a mixed message from the government—Americans need to save more for retirement, but when times get tough, these are the first funds to be tapped for assistance. Many of the recent regulatory changes center around early access to retirement funds. Priority as to implementation should be based upon a good understanding of the progress toward retirement preparedness of plan sponsors’ participants versus a critical need to access those funds now. There is certainly a valid concern as to excessive leakage further exacerbating a lack of sufficient savings—whether from implementing some of the new provisions such as the coronavirus-related distribution (CRD), more favorable qualified plan loan rules under the CARES Act or the qualified birth/adoption distribution under the SECURE Act. This needs to be weighed against whether your employees really do have an immediate need to access such funds for survival. From a participant’s standpoint, flexibility in being able to choose which method of access will work best for them (e.g., CRD versus a loan) is desirable but risky too. If the plan sponsor is going to implement a variety of these provisions where the employee should choose the best course of action, proper education and analysis tools must be provided so the participant can make an informed decision. The plan sponsor should also be prepared to answer questions on how these provisions work and identify where further guidance is needed.
Partner, Faegre Drinker
Former U.S. Assistant Secretary of Labor for Employee Benefits
In the near term, the issues plan sponsors need to prioritize fall into two buckets. First, plan issues created by the business response to the pandemic, such as layoffs, furloughs and terminations. Second, issues related to deciding what to do about the new CARES Act options, including the coronavirus-related distributions and loans. Congress may also pass some new provisions that will go to the top of the pile, but it is not clear when that may happen.
Regarding the first bucket, business decisions related to the pandemic have significant implications for plans and participants. For example, laying off large numbers of workers can trigger a partial plan termination. Deciding to eliminate required matching contributions or to make similar changes may require advance notice and a plan amendment. Participants may have very different experiences under the plan terms depending on their employment status—someone on unpaid leave may be eligible for a traditional plan loan, while someone who has separated from employment may be ineligible for new loans and may face loan repayment obligations on existing loans. Before taking business actions that will affect the plan, plan sponsors need to make sure they are following ERISA’s requirements. While the DOL and the IRS have relaxed some of these requirements in light of the crisis, many still apply, and it will be much easier to avoid problems now than to clean them up later.
Regarding the second bucket, plans sponsors need to keep in mind that what the CARES Act allows them to do, what they may want to do and what their record-keeper is capable of, are three different things. For example, do plan sponsors want employees who have been laid off to be able to get a coronavirus loan? Some record-keepers may not be able to process loan origination or ongoing payments where there is no payroll deduction. Plan sponsors need to talk to their record-keepers right away to understand the practical options and make informed decisions. It is important to remember, however, the these are not fiduciary decisions but settlor decisions. The company is deciding what benefits it wants to offer, and it is not acting as a fiduciary under ERISA until the plan begins to implement those decisions.
In the long term, the SECURE Act is the next priority. Three of the most significant provisions affecting plans go into effect next year or a little later. First, the DOL will be issuing new disclosure rules requiring a lifetime income projection annually on participants’ benefit statements. These new rules are due in December, though the timing is likely to slip. As these will likely be interim final rules, we won’t get an advance look—we will have to comply with the new rule while offering comments on how to fix it, making compliance issues a little more complicated. Second, the new pooled employer plans (PEP) will be available in January, and some plans may wish to consider participating in one rather than sponsoring their own, individual plans. This is a new option in the plan marketplace, allowing unrelated employers to come together in a single plan covering all participating employers that will be sponsored and administered by a pooled plan provider. Whether this will make sense for companies is something they will need to evaluate individually. Finally, going fully into effect in 2023, plans will have to allow part-time employees who work 500 or more hours in each of three consecutive years to be eligible for the plan. This will require record-keepers, payroll provider and the employer to gather new data to properly identify and offer benefits to these workers.
Also, in the long term, I think we will be dealing with fallout from the CARES Act changes. First, we have until 2022 to finalize the plan amendments that retroactively permit the new provisions. This flexibility will be vital in cleaning up problems that will occur along the way. Plans likely also will begin education campaigns to try to convince those who took CRDs to begin rolling those funds back in over the next three years. Less happily, I fear that there will be a wave of participants who took loans and can’t make the payments when they begin coming due next year, triggering loan defaults.
McDermott Will & Emery
Between the SECURE Act and the CARES Act, plan sponsors are facing a large number of potential statutory and regulatory changes. Some changes are required for 2020, such as the SECURE Act increase to the required minimum distribution age from 70 1/2 to 72. Other changes are required in later years. In addition to required changes, plan sponsors should prioritize options that can provide immediate help to either employees or the corporate bottom line. For employees, that may include the penalty-free CARES Act temporary distribution and loan enhancement options. For plan sponsors, that may include pension funding relief to delay required pension contributions until 2021. Beyond that, plan sponsors should focus on options that may be the most attractive to their employees. For example, many employers believe the SECURE Act penalty-free withdrawals for birth or adoption or the CARES Act student loan benefit option may help them attract and retain employees.
Senior Partner, National Practices, Retirement Solutions
Plan sponsors should understand whether new provisions are required, optional or present an opportunity. They will also want to consider the impact on employees, communication needs, administrative complexities and cost.
Even required changes may call for decisions. For example, the age for required minimum distributions (RMDs) is increasing from 70 1/2 to 72. Sponsors wishing to keep the earlier payment will need to update administrative processes as those payments are no longer RMDs. New part-time eligibility rules and lifetime income disclosures require early planning.
Optional changes such as adoption distributions and coronavirus-related distributions and loans provide flexibility to support employees’ short-term financial security but may put long-term retirement income at risk. Plan sponsors should consider the needs of their workforce, administrative complexities and tax implications.
Now is the time to consider aspects of the SECURE legislation that can positively impact participants’ financial security as well as plan sponsors’ administrative and fiduciary obligations. The automatic escalation and lifetime income provisions in the SECURE Act can have a meaningful impact on participants’ financial security in retirement. New pooled employer plans will produce better outcomes for many participants, while also easing the administrative and fiduciary burdens placed on plan sponsors.
Senior Director, Retirement
Willis Towers Watson
The pandemic has effectively shut down any planning in the DC space. The SECURE Act is a victim of that. The focus immediately switched to pandemic response, saving businesses and employees. In the retirement space this meant opening access to participant account balances afforded by the CARES Act. Many employers also looked at their plans as ways for employees to build short-term emergency savings through after-tax accounts and some suggested that employees consider stopping their 401(k) savings altogether as a way to prepare for the unknown ahead. A few employers have suspended their matching contributions, as well, all in an effort to manage the shocking effects of the pandemic.
Could the SECURE Act provide a path forward? Now that the initial shock is over, many employers have started thinking about post lockdown and have considered the retirement readiness impact of 401(k) retrenchment, furloughs or layoffs. Not unexpectedly, the numbers tell a story of sudden headwinds and drops in retirement readiness. How bad, is still an open question. Longer term, open MEPs could provide more access for retirement savings plans through corporate restructurings or broader association programs. Liberalization of the auto-escalation limits will provide incentive for people to save more as well. And being able to push required minimum distributions until age 72 could help with short-term cash management.