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Around the world, people are finding saving for retirement increasingly difficult. This is partly because employers are moving from defined benefit to defined contribution plans; as a result, many workers are assuming more of the burden for their retirement savings. The retirement savings gap – the difference between the amount of money needed for a comfortable retirement and the amount actually saved – is getting wider and wider.
To help bridge this savings gap, governments are taking steps to help workers better prepare for retirement. In the U.S. – where only one in three workers is on track to retire comfortably at age 67, and one in three employees of private employers lack access to a workplace retirement plan – a recently enacted law is intended to help more workers save for retirement.
Signed into law in December 2019, the Setting Every Community Up for Retirement Enhancement (SECURE) Act encourages the establishment of open pooled employer plans (PEPs). Under an open PEP, employers from all industries and sizes can band together to offer employees defined contribution retirement plans. And thanks to the scale of the PEP, the plan’s outcomes will be on a par with those of larger employers – plus participants will gain better access to experts that can help them with the plan’s design.
The new law eliminates some of the other obstacles to employers offering retirement plans, including allowing plan sponsors to outsource plan administration and fiduciary responsibilities. Small businesses will also be provided with tax incentives for supporting their employees’ retirement plans with automatic enrollment.
“Though this law won’t close the retirement savings gap on its own, it is a big step in the right direction,” says Paul Rangecroft, director of the North America retirement practice at Aon.
WHY IT MATTERS
The SECURE Act makes it easier for smaller employers to join with others to offer their employees retirement plans. Under previous law, employers looking to join PEPs had to share certain characteristics (such as a common industry or geography), and a single employer PEP participant guilty of a compliance or administrative failure could result in the disqualification of the entire PEP. The SECURE Act repeals those rules.
“You can imagine the spillover effect that the previous rule would have in terms of employers’ receptivity to banding together, if they’re not only subject to risks based on their own actions, but the actions of others participating in the program as well,” says Rick Jones, senior partner in the retirement practice at Aon.
Participating in PEPs can grant employers the scale to take better advantage of financial markets and administrative platforms, while access to new expertise can lead to improved plan features and management.
“Size is an edge when it comes to employer retirement plans,” says Jones. “Aggregating assets and people now means better economies of scale for groups of smaller employers. This format also unlocks access to investment expertise that could offer significantly improved outcomes: over a career of participation, we’ve seen it mean 15 to 20 percent improvement in retirement outcomes for plan participants.”
Larger employers could benefit from the new rules regarding open PEPs as well as through access to better features and more competitive programs.
Expanded Eligibility, New Investment Options
In addition to expanding employers’ access to PEPs, the SECURE Act signals other retirement plan changes as well, including making long-term part-time employees eligible for 401(k) plans and raising the required minimum distribution age for participants in traditional individual retirement account (IRA) plans from 70.5 to 72 years.
Only two out of five part-time employees currently have access to workplace retirement plans. But under the SECURE Act, employees who work at least 500 hours for three consecutive years will have access to salary deferrals into retirement savings plans, though employers are not required to contribute.
The U.S. law also makes it easier for employers to offer annuities – with guaranteed lifetime income – as a retirement plan investment option through new safe-harbor provisions for insurance company selection.
With more employers closing or freezing traditional defined benefit pension plans, retirees are increasingly reliant on direct contribution savings to fund their retirements. Meanwhile, longer life spans raise the risk of outliving retirement savings. Making it more attractive for employers to offer an annuity option among retirement plan investments could help address many retirees’ need for lifetime income.
The SECURE Act also improves the portability of annuity plans by allowing employees to transfer their lifetime income option into another qualified plan or an IRA.
Reshaping The Retirement Landscape
The U.S. Social Security program – and retirement age of 65 – was created around 1935, when the global population over age 60 was 205 million. By 2050, that number could reach 2.1 billion.
At a time when we’re living longer than ever, the U.S. is not alone in evaluating retirement and ensuring plans will sustainably support retirees. The U.K. government has announced plans to gradually raise the pension-eligible age to 67 by 2026, up from 60 for women and 65 for men. Japan, with the world’s longest life expectancy, may seek to raise its retirement age above 65 to offset labor shortages and growing debt as well as combat isolation of the elderly population. Like the U.S., Canada’s government has increased focus on the role employers can play in shaping the future of retirement: the country will increase employer-contribution requirements to a mandatory pooled plan to 5.95 percent of wages, up from 4.95 percent.
“The provisions of the SECURE Act are major developments for the retirement income landscape,” says Gregory Fox, associate partner in the investment practice at Aon. “We’re hopeful that this will help encourage plan sponsors that have been waiting to take action to get off the sidelines, implement some of these retirement savings solutions and do more to close the retirement savings gap for workers in the U.S.”