THIS HAS BEEN A CHAOTIC YEAR. BUT IN CHAOS THERE IS OPPORTUNITY— AND THE NEED TO REDEFINE RETIREMENT STRATEGY IS NOW.
by PETE SWISHER
NO ONE REALLY EXPECTED THE SECURE ACT TO PASS IN 2019.
And no one expected that, if it passed at the end of 2019, the deadlines would not be adjusted to give the industry more time to prepare. And no one expected that the biggest thing to hit the retirement industry, legislatively, in more than a decade would be kicked to the curb by a global crisis that reads like a script of a scary movie. But here we are.
Major legislation demands a strategic response in any industry, and the SECURE Act is very major legislation for the retirement industry. Even if we skip the two potential game-changers—the PEP/MEP/GOP provisions (pooled employer plan/multiple employer plan/“group of plans”) and the lifetime income provisions—SECURE contains 23 other provisions that require legal analysis, product planning, programming, workflow changes, training, implementation, and troubleshooting. This is a heavy lift on its own.
But when we include the need to rethink business strategies around the potential game-changers, and the looming Jan. 1, 2021 grand opening date for the first PEPs, and the Jan. 1, 2020 start date for many other provisions, planning for SECURE in 2021 and beyond is not merely important but urgent. It is priority No. 2, behind coping with the COVID-19 crisis.
This article takes a strategic look at SECURE’s provisions in four groups: big changes, smaller changes, lifetime income, and PEP/MEP/GOP. Rather than repeating the details of the provisions themselves, the emphasis is on strategic perspective and high-level implementation. The first step is to explore a framework for viewing SECURE implementation overall.
A FRAMEWORK FOR DEALING WITH THE SECURE ACT
Timing and the Need for Interim Plans
The first element of a rational framework for SECURE planning is simply to understand the timing. Most of SECURE’s provisions became effective on Jan. 1, 2020—only 12 days after the Act became law. The reason this happened is that legislators simply ran out of time. They had to either include SECURE as it stood or lose the opportunity to pass it as part of the year-end funding bill, and they chose to pass it. Had there been more time, the January 2020 dates would have been moved to 2021 and the PEP launch date to Jan. 1, 2022, and other dates would have been adjusted accordingly. As it happened, the only last-minute change was to add Section 601, which gave us time to amend plan documents, but otherwise left the text of SECURE intact.
Terminology and Legislative Processing
The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 was added to FCA 2020 as Division O late in the legislative process, and became law on Dec. 20, 2019.
The Further Consolidated Appropriations Act, 2020 (FCA 2020) was an “omnibus” funding bill that was “must pass” legislation in order to avoid a government shutdown at the end of 2019. “Must pass” legislation can be an opportunity for lawmakers to throw everything but the kitchen sink into a single bill by tacking on largely agreed-upon bills as amendments. “Omnibus” refers to the fact that the funding bill was for the entire government, versus separate funding bills for different departments and expenditures. In the case of FCA 2020, there were so many amendments that Congress split the omnibus bill into two parts—thus, FCA 2020, as the smaller of the two parts of the “omnibus,” is affectionately referred to as the “minibus.”
Oh, what havoc. For example, changing the Required Minimum Distribution (RMD) starting age1 to 72 instead of 70½ is not, on the surface, a major change. But it is quite complex operationally.
Participant notices for RMDs for 2019 went out, in general, in late 2019 or January 2020. For some portion of those receiving such a notice, the new law changed their required beginning date. IRS Notice 2020-6, published on Jan. 24, 2020, therefore required financial institutions that had already sent RMD notices to individual retirement account (IRA) owners to furnish an updated notice by April 15, 2020. Providers had already sent notices before year-end in most cases; the law passed Dec. 20, 2019, changing the rules; IRS published guidance at the end of January; and providers only had until April 15 to get new notices out. The IRS called that whole two months they gave us “relief.”
To add to the complexity, provider systems may need to handle two different groups of participants for RMD purposes: those born before or after the July 1, 1949 cutoff date. Those born before that date still have RMDs based on the 70½ rule; those born on or after it use age 72. This exchange between ARA’s Brian Graff and Robert Richter in the ASPPA Spring Virtual Conference2 was instructive:
Richter noted that plans could technically just stick with 70½ for certain implementation purposes.3
Graff: “But then people would be grumpy.”
Richter: “But they’ll be grumpy anyway— look how old they are.”
To wrap up the discussion on timing, here is how timing might play out for a service provider with respect to RMDs:
1. Scramble to respond to last-minute change by April 15.
2. Study the rule; get legal counsel involved; get a feel for what systems changes are needed.
3. Realize that the RMD age change is offset in 2020 by the CARES Act4 suspension of RMDs.
4. Realize that distributions intended to be an RMD for a 70½-year-old may now actually be rollover distributions, and require a IRC Sec. 402(f) notice and withholding.
5. Make decisions.
6. Update the product roadmap.
7. Make the actual changes when resources can be freed.
NO ONE EXPECTED THAT THE BIGGEST THING TO HIT THE RETIREMENT INDUSTRY, LEGISLATIVELY, IN MORE THAN A DECADE WOULD BE KICKED TO THE CURB BY A GLOBAL CRISIS THAT READS LIKE A SCRIPT OF A SCARY MOVIE.
But what do you do in the meantime, before your systems and procedures are fully updated and people fully trained? You have no choice but to implement an interim plan that addresses things like what to tell your call center staff to say and what sorts of manual workarounds to do while waiting for systems to catch up.
The Basic SECURE Planning Formula: Strategy + Product Roadmap + Interim Plan
The simple answer to the question of how to plan for 2021 and beyond with respect to SECURE is strategy + product roadmap + interim plan.
The Product Development and Management Association (PDMA) publishes a “Body of Knowledge”5 that lays out best practices for product ideation, creation, and management. A product roadmap is a common tool for tracking changes to the product portfolio, and special software exists to facilitate such efforts and manage the needs of all stakeholders. Following these sorts of best practices makes ops people feel warm and happy. Skipping steps and rushing to market, I am told, makes them dyspeptic. Unfortunately, the timing and complexity of SECURE call for a bit of dyspepsia.
The product roadmap is the high level, long-term plan for SECURE implementation. The interim plan is the short-term response.
BIG CHANGES
There are seven provisions I semi-arbitrarily label “big” (other than the potential game-changers).
Long-Term Part-Time (“LTPT”) Workers
This is a cool provision that might make a difference for a lot of people who would otherwise not save, but there is broad consensus that the provision6 is trouble operationally. It has consequences for plan design, creates a need for challenging systems programming, and will increase the difficulty of plan administration for employers. The basic rule is that employees with three consecutive 12-month periods with more than 500 hours of service must be offered the ability to make salary deferral contributions in a 401(k).
Blake Willis, Chief Operating Officer of July Business Services, after rattling off a series of open questions and operational challenges associated with the LTPT rule, painted this picture of what may happen: “Some small business owners will quit… the first time they get a $500 penalty on someone they never thought was eligible.” And his team’s ability to help the employer is limited by the time they receive the data: “By the time we finish the year-end reports, it’s July of the following year before we realize there was a problem.” He fears that some employers will give up on the plan as being too much work.
On the surface it looks like we have time to prepare—the provision is technically effective already, but we do not have to count service periods prior to 2021. Because the rule calls for three consecutive years of 501+ hours, the soonest someone could become eligible under this rule is Jan. 1, 2024. But the need for an interim plan is strong—we must be ready to tell employers what new procedures they need to follow starting Jan. 1, 2021, so that we can capture the right data. Do not let the 2024 date lull you into a false sense of security.
Safe Harbor 401(k) Notices and Elections
Much has been written about these popular new provisions—the ability to implement a safe harbor provision at year-end without a prior notice, or even implement a safe harbor for the plan year up until the tax filing deadline (i.e., after the plan year-end) if the nonelective contribution is 4% instead of 3%.7 But there are multiple unanswered questions, so for planning purposes, an interim plan might include these elements:
• Do not stop sending notices in 2020.
• Develop a “crib sheet” of talking points for coaching a client through a year-end change or addition of a safe harbor.
• Integrate the crib sheet with CARES Act changes, such as the ability to suspend a safe harbor mid-year due to the crisis.
The long-term product roadmap might have a complex series of upgrades needed for systems and procedures under the heading, “SECURE Safe Harbor Upgrades.”
403(b)(7) Plan Terminations
This is a welcome addition8 to the toolkit, allowing us, finally, to terminate and distribute Section 403(b) (7) custodial account plans. This provision will create a wave of consulting activity once we receive additional guidance from the IRS.
Startup Cost Credit for Small Employers
The credit has been around since the Pension Protection Act of 2006 (PPA), but SECURE dramatically increased the amount of the credit,9 from a maximum of $500 per year to a maximum of $5,000. My experience with the credit was that it was not big enough to cause retirement industry professionals to memorize and talk about it regularly with clients. That has now changed, and anyone who deals with startup plans should: (a) memorize it and be prepared to spend more time talking about it; and (b) consider integrating credit projections into sales proposals. This is a substantial credit, and product planners will want to consider how much leverage it affords them with their startup plan pricing, and how best to maximize that leverage in the sales process. When you contemplate changes to your sales proposal system for startup credits, also include illustration of the small employer automatic enrollment credit available under Section 105.
Adoption of New Plans Until Tax Filing Deadline
One of the American Retirement Association’s big wins, Section 201 allows employers to adopt a new plan up until the tax filing deadline, including extensions, for plan years starting in 2020 and beyond. For planning purposes, consider the business implications for a TPA. November and December historically include a rush of new plan formations before the Dec. 31 cutoff, including the advisor who calls on Dec. 28 to plead that you rush his client a plan document. The employers driving the year-end rush are those whose advisors are thinking ahead; other employers get to tax time a few months later and it is too late to do anything for the tax year.
The new deadlines will dramatically increase our ability to help small business owners start new plans favorably. The “sweet spot” for plan design, startup, and cash balance conversations and sales is now roughly September through March.
Higher Penalties
Congressional “PAYGO” rules require most legislation to be “paid for” (“pay-as-you go”) by adding revenue-raising provisions (“pay fors”) to offset any added costs. One of the key “pay fors” in SECURE was a tenfold increase in the penalties10 for late/incomplete filing of the Form 5500, related forms, and withholding election notices. When you consider that roughly
20,000 employers per year11 take advantage of the DOL’s Delinquent Filer Voluntary Correction Program (DFVCP) for such late filings, the argument in favor of removing this fiduciary duty from employer’s plates though some sort of 3(16) or limited-scope administrative fiduciary service just strengthened dramatically.
A Crib Sheet for Sales Consulting
A useful tool for anyone client-facing would be a crib sheet that unifies talking points for multiple law changes: delayed plan adoption, late adoption of safe harbor provisions, the new 15% maximum for QACA safe harbors, increased startup credits, the credit for addition of automatic enrollment, and LTPT workers. All are pertinent to a consulting discussion with a startup plan prospect and plan design overall. This would be a useful training class for salespeople and frontline administrators.
SMALLER CHANGES
The “smaller” changes are not necessarily smaller from an implementation standpoint. In fact, many are quite tricky. The RMD change falls in this category, along with related changes such as Sec. 401, “Modification of required distribution rules for designated beneficiaries.”
Another challenging implementation story is that of Section 133, “Penalty-free withdrawals from retirement plans for individuals in case of birth of child or adoption,” about which much has been written elsewhere. Also Section 116, “Treating excluded difficulty of care payments as compensation for determining retirement contribution limitations.” I still have no idea what that one actually means, but it sounds like an opportunity for a client’s reporting of compensation on its year-end census to be even more incorrect than usual.
NOW, IN 2020, IN THE MIDST OF THE GLOBAL PANDEMIC, IS THE TIME TO PLAN FOR THE FUTURE OF YOUR BUSINESS.
Some of the smaller provisions are very specific fixes without broad application in the industry, such as the provisions regarding community newspapers, 31 firefighters, 529 plans, and using credit cards for plan loans.12 Other provisions are just for IRAs—the repeal of a maximum age for contributing to a traditional IRA, and special compensation rules for graduate students.13
Some provisions will be relatively easy to fix, such as the Section 102 increase in the QACA14 cap from 10% to 15% after the first plan year. There are complexities, but the programming challenges are not as great as for other provisions.
Some are just for defined benefit plans:
• Section 205, Modification of nondiscrimination rules to protect older, longer service participants. This one is actually a very big deal for frozen DB plans.
• Section 206, Modification of PBGC premiums for CSEC plans.
Lifetime Income15
Let’s start with what should be obvious but is worth stating anyway: There is more money in insurance than in everything else. There has to be—insurance companies offer guarantees, and guarantees are expensive. The typical general account stable value product therefore has a total “spread” of 175 basis points or more (sometimes much more), as does a typical CD (bank certificate of deposit). As a general statement, no retirement plan service provider of any type—TPA, recordkeeper, advisor, whatever—will make as much money as an insurer does on guaranteed products.
A second obvious point worth restating is that we really need more guaranteed products. A quote I have been repeating for years is, “The single premium immediate annuity is the silver bullet of retirement planning.”16
But the SECURE Act’s lifetime income provisions are not, by themselves, game-changing, because they lack one important element: a change to the Qualified Default Investment Alternative (QDIA) rules.17 The current rules cast doubt on whether QDIAs can include insurance elements. The ERISA Advisory Council’s November 2018 report18 included a good summary of the issues.
But if regulators were to change the rules (or simply clarify them favorably) to make it easier to include insurance elements in QDIAs, the combination of SECURE’s lifetime income provisions with updated QDIA rules would absolutely be a game-changer. There is reason to think this could happen eventually, so SECURE’s lifetime income provisions might be viewed as the first half of some game-changing enhancements to plans’ ability to increase participants’ lifetime income—and create new in-plan revenue opportunities—without substantially increasing plan sponsor liabilities.
One final point: if we expect PEPs, MEPs, and GOPs to be a big deal, then we can expect lifetime income solutions to compete for “shelf space” in and around these structures.
PEPs, MEPs, AND GOPs
SECURE is about more than “open MEPs,” but, by far, this element of the Act (and RESA19 before it) got more attention than all other provisions combined. SECURE and RESA were effectively synonymous with “open MEPs” from 2016-2019 in the public discourse.
THE “SWEET SPOT” FOR PLAN DESIGN, STARTUP, AND CASH BALANCE CONVERSATIONS AND SALES IS NOW ROUGHLY SEPTEMBER THROUGH MARCH.
What’s All the Fuss About?
In case you have been living under a rock, the situation is this:
• Congress has had a 10-year love affair with MEPs; SECURE’s PEP/MEP/GOP provisions are the result.
• There are two “group plan” provisions in the Act: Section 101, “Multiple employer plans; pooled employer plans,” and Section 202, “Combined annual report for group of plans.”
• A PEP is a new type of MEP. All PEPs are MEPs, but not all MEPs are PEPs.
• The two key differences between PEPs and other MEPs are:
• No commonality requirement (any employer can join a PEP; other MEPs require some “nexus” or commonality among adopters, such as being members of the same association). So a PEP is an “open” MEP that is a single plan.
• Financial institutions and service providers can sponsor them. This is a bigger deal than the “open” part, though this is not widely recognized.
• PEPs are sponsored by a “pooled plan provider” (PPP) who is responsible for “substantially all”20 fiduciary functions.
• A “group of plans” (GOP) consists of multiple single-employer plans that have the same fiduciaries, funds, and plan years. A GOP can file a combined Form 5500, thereby taking advantage of one of the advantages of MEPs.
The marketplace impact is that virtually every retirement plan provider in the United States, whether advisor, TPA, recordkeeper, or other, must figure out a strategy. SECURE is a “forced response” law: No one can afford to not respond to the PEP/MEP/GOP provisions, even if the response is to sell against them. For many, the response will be to create one or more new product offerings using one or more of the various group structures. For some, those new products will be central to their branding and distribution strategy.
Timing
The “grand opening” date for the first PEPs is Jan. 1, 2021, but actual product launches will be staggered over time based on several factors. First, there is the simple fact of timing, as well as how the COVID-19 pandemic has delayed all other projects.
Second, there is a need for prohibited transaction exemptions (PTEs) from the DOL with respect to certain business models, such as the inclusion of proprietary products or the methods for charging fees for managed account services. As a general rule, firms with the fewest conflicts of interest who have already begun working on PEP strategy will be first to launch. Proprietary product vendors or those with a more complicated story around conflicts of interest will wait for guidance followed by legal advice before launching.
The Pulse of the Marketplace
“What are you seeing out there?” and “What are other firms doing about PEPs?” are common questions these days. The short answer is that COVID-19 has forced SECURE and group plans onto back burners for most (but not all) of the industry, but the volume of product owners seeking serious answers is growing rapidly. Some firms are waiting to see what others do before forming their own strategy. Others are actively at work on PEP products. And some firms already have a clear idea of the products they intend to build, but are waiting on DOL guidance for a green light.
Imagine a scenario in which any of several brand-name firms announces a PEP launch. All it takes is one. That one firm will announce to employers in national marketing campaigns, “There’s this new thing called a PEP and here’s why you want one.” The simple existence of that message in the marketplace will move the needle. The general sentiment among industry members is that this scenario will eventually take place. Early launches are likely to be from smaller, more nimble firms, but one or more larger players will eventually enter the field with a PEP.
Another common line of discussion is “PEP vs. GOP.” GOPs can imitate common MEP structures in several respects—such as having a common 3(16) administrator, trustee, investment fiduciary, and fund lineup. Such structures have existed for years— SECURE simply gives them an awkward name and a new advantage. The single Form 5500 may also mean that there is only one centralized audit, though this is not yet clear. One common question is, “How is a GOP not identical to a MEP or PEP, but with less hassle for the service provider?” The short answer is that there are differences and those differences matter, pro and con. But that is a topic for another article.
Imagine a second scenario in which any of several brand-name firms announces the launch of a GOP (probably branded with a name catchier than “GOP”). The general sentiment among industry members is that this scenario too will eventually take place. The pulse of the marketplace, in other words, is that the PEP and GOP structures will both be used by one or more major players and numerous smaller ones, though planning and implementation have been slowed by the COVID-19 crisis.
Prediction: A Large-Scale Transfer is Underway
Twenty years ago, very few plan sponsors had retained a discretionary investment fiduciary. Today, something like 25% of sponsors have done so,21 and the number is growing rapidly. Investment fiduciary duties are shifting rapidly from employers to providers.
Ten years ago, no one was talking about 3(16) administrators. In 2017, only three TPAs at a conference of roughly 30 larger TPAs were offering 3(16) services. In 2019, at the same conference, nearly half of TPAs present said they were offering some form of 3(16) service.
The direction seems clear and does not need MEPs, PEPs, or GOPs to make it real. But PEPs introduce a new dynamic: the requirement for the PPP to be a named fiduciary and the plan’s 3(16) administrator and to be responsible for “substantially all” compliance functions. The retirement industry is used to hiding behind non-fiduciary contract language. The PPP role will not allow this for the most part—it is difficult to hide from language like “substantially all.”
If a relative handful of industry players launches group programs, including PEPs, the marketplace messaging of the industry will be shifted. The shift may be small at first, but action begets reaction. Over time, SECURE will add thrust to a movement that is already underway: a large-scale transfer of fiduciary responsibilities from employers to service providers over time.
It is not possible to get employers further divorced from fiduciary duties than in a MEP or PEP. GOPs, group trusts, and other structures can imitate this to a point, though the actual degree of transfer is a sliding scale depending on the program. But if we simply plot the trend, it is toward genuine transference of duties— and the endpoint of the curve is far up and to the right.
YOUR 2021 SECURE ACT ACTION PLAN
If SECURE compliance is your responsibility, what sorts of tools do you want at your fingertips? The toolkit looks something like this:
• Interim plans. Crafted with the help of attorneys, resources at the American Retirement Association, and in the broader retirement plan community.
• Crib sheets. Field versions of your interim plans. Your people need to know what to say and do while your firm moves along the project roadmap.
• Product roadmap. A method of managing product changes across the organization.
• SECURE provisions matrix: A simple list of all the provisions with high level info on what they mean, what the interim plan is, and what changes are implied for the project roadmap.
• Brainstorming on the game-changers. Spend special time thinking about the potentially transformational lifetime income and PEP/MEP/ GOP provisions.
It all starts with strategy. As noted above, SECURE is a “forced response” law with significant long-term strategic implications for everyone in the retirement business. Planning for 2021 means starting the wave of implementation projects that SECURE’s 28 provisions necessitate. But at a higher level it means that now, in 2020, in the midst of the global pandemic, is the time to plan for the future of your business. PC
Pete Swisher is one of the retirement industry’s most respected voices. He is the President of Waypoint Fiduciary LLC, a prolific writer and speaker for the financial industry, and an expert in PEPs, MEPs, and other group retirement programs.
FOOTNOTES
1. Section 114 of SECURE, which changed the required beginning date (RBD).
2. “A Close Look at the SECURE Act” presentation, May 7, 2020.
3. The requirement is to distribute the minimum starting on the required beginning date; plans could technically keep an age 70½ requirement.
4. Coronavirus Aid, Relief, and Economic Security (CARES) Act.
5. Based on the 2017 edition of Product Development and Management Body of Knowledge: A Guidebook for Training and Certification, Allan M. Anderson, PDMA.
6. SECURE Act, Section 112.
7. SECURE Act, Section 103.
8. SECURE Act, Section 110.
9. SECURE Act, Section 104.
10. See SECURE Act, Sections 402 and 403.
11. The DOL publishes these statistics annually at dol.gov.
12. SECURE Act, Sections 115, 301, 302, and 108.
13. SECURE Act, Sections 107 and 106.
14. The Qualified Automatic Contribution Arrangement safe harbor.
15. SECURE Act, Sections 109, 203, and 204.
16. Stephen Pollan and Mark Levine in Die Broke. I may be slightly off on the exact wording—I can’t find my copy.
17. Predominantly, the rules in question are the DOL’s regulations under 29 CFR 2550.404c-5 establishing the framework for QDIAs, which were created by the Pension Protection Act of 2006.
18. “Lifetime Income Solutions as a Qualified Default Investment Alternative (QDIA)—Focus on Decumulation and Rollovers,” available at dol.gov.
19. The Retirement Enhancement and Savings Act (RESA), a predecessor to the SECURE Act.
20. SECURE Act, Section 101(a)(1)(e)(2)(B).
21. From a presentation at the annual conference of Commonwealth Financial Network in October 2019, citing a 2018 survey of plan sponsors.