While the greening lawn and budding magnolia tree outside my
office window are a great boost for my mood, the emergence of spring is really
just a small part of my uplifted spirits. As more coworkers, friends, and
family receive COVID vaccines, restaurants bustle with socially distanced
patrons, and more Americans return to work, there is a renewed sense of hope
and optimism in the air.
With access to vaccine distribution expanding and the
economy building steam, there’s increasing belief that a hiring boom may be on
the horizon too. The job growth that we saw in March—which was at the fastest
pace since summer of 2020– could continue to rise in the months ahead.
For business owners and employees, this is welcome news. But
it may also mean that you as employers may need to consider making a few
adjustments to benefit offerings in order to attract new, quality workers—and
retain your existing talent.
Our recent Principal Business Owner Insights survey of 1,011
small- to medium-sized businesses found that more business owners today see
such benefits as a key to their overall success.
-Business owners reported that the top two goals of offering
an employee benefits package are affordability (50%) and the ability to attract
and retain employees (42%).
-A larger share (58%) now say employee benefits also help
improve workforce productivity.
If you’re concerned about staying a step ahead of your
competition’s benefit offerings, understanding the legislative work Congress is
expected to undertake this year related to retirement savings can help both you
and your employees.
5 important legislative updates that could impact
retirement savings plans
Optimism remains high that Congress will take up the
proposed Securing a Strong Retirement Act (often referred to as “SECURE 2.0”).
Developed by Reps. Neal (D-Mass) and Brady (R-TX), this bill is packed with new
features that can benefit employers, retirement savers, and financial
professionals alike.
1. Start-up tax credit. If you don’t already offer a
retirement plan for your employees, here’s some good news: Congress
substantially increased the start-up tax credit in 2019 to a maximum possible
credit of $5,000 per year for the first three years of the plan’s operation.
SECURE 2.0 would go even further for employers with up to 50
employees:
100% of start-up costs could be considered for the credit
(rather than the current limit of 50%), making it even more feasible to attain
the maximum $5,000 per year credit.
Additionally, a new credit would be offered equal to a
stated percentage of employer contributions up to $1,000 per employee. The
stated percentage would be 100% of years 1-2, 75% for year 3, 50% for year 4,
and 25% in year 5. Note: This additional credit would be phased out for
employers with 51 to 100 employees and would not apply for defined benefit
plans.
2. Increased support for automatic enrollment. Our
recent Retirement Security Survey found that nearly half of retirees (49%)
wished they would have started saving for retirement earlier, and 35% wished
they would have saved more in their employer-sponsored retirement plan.
One of the most effective methods to help employees
successfully save in a retirement plan is through automatic enrollment. In a
2018 nationally representative survey of private sector workers at small- to
midsize-businesses with five to 500 employees, the Pew Charitable Trust found
that the vast majority of survey respondents repeatedly indicated that they
would remain in a retirement plan and begin saving for their future, if automatically
enrolled.
This aligns with what we’ve seen in our own, recent
research:
90% of participants stay in the plan once they’re
automatically enrolled.
83% of employees say they’re ok with automatic enrollment at
a 6% deferral percentage.
Congress is so inspired by the benefits of automatic
enrollment that they would require the feature—along with annual automatic
escalation of contribution rates—for most new plans established after enactment
of SECURE 2.0 if passed.
Existing plans would be exempted from the requirement.
However, whether your business has a plan today or is just starting one, SECURE
2.0 could provide two important incentives for you to do so:
A new $500 tax credit per year for the first three years
after adoption of the feature.
A new safe harbor allowing employers to self-correct
innocent errors in the enrollment process within 9½ months following the end of
the plan year end in which the error occurred.
3. Encouraging employees burdened with student debt to
save. Are you looking to recruit recent college grads, or do you want to
help current employees who may be unable to participate in your retirement plan
due to student loan debt? Nearly one-quarter of respondents in our recent
Retirement Security Survey with plan sponsors reported paying down student loan
debt as a financial wellness topic of interest.
SECURE 2.0 aims to give employers a new benefit tool by
allowing you to treat student loan repayments as elective deferrals for
purposes of making employer matching contributions on behalf of the employee.
4. Helping retirees turn their 401(k) into a guaranteed
monthly paycheck. Congress has been appropriately focused on helping savers
in defined contribution plans turn portions of their nest eggs into a
guaranteed monthly paycheck in retirement. Recent findings from Greenwald
Research/CANNEX show 63% of consumers see guaranteed lifetime income—in
addition to Social Security—as highly valuable. And, our own Retirement
Security research findings revealed that 46% of respondents say that annuity
ownership brings them more confidence.
When the SECURE Act passed in 2019, Congress cleared
barriers that had previously prevented plan sponsors from adopting guaranteed
income options in their plans’ investment menus. SECURE 2.0 would address additional
barriers to retirees’ willingness and ability to purchase guaranteed income
that are embedded in the required minimum distribution (RMD) rules.
RMD rules currently prohibit common features of life
annuities that help address concerns people have when considering an annuity
purchase. For example: Will my payments increase to offset inflation? Or, if I
die prematurely, will my family get back the remainder of what I paid for the
annuity? SECURE 2.0 would amend the RMD rules to allow basic cost of living
increases, return of premium death benefits, and period certain guarantees.
The current RMD rules have also been an impediment to the
use of qualified longevity annuities (QLACs), annuities designed to begin
payments at the end of an individuals’ life expectancy, because those rules
generally require payments to commence before QLACs begin payments. SECURE 2.0
would address these problems.
5. Expanding opportunities for businesses and
organizations to join pooled employer plans (PEPs). Congress first authorized
the establishment of PEPs in 2019 with the SECURE Act. SECURE 2.0 would clarify
that the small employer start-up tax credit would apply in full for their first
three years or any qualifying small employer who joins a PEP and further would
allow 403(b) plans to participate in PEPs.
Although SECURE 2.0 has not yet been reintroduced, it is
expected to make its way to Congress soon and enjoys broad bipartisan support.
We’ll continue to watch closely to see if this bill will be considered as part
of a larger legislative initiative or as a separate, stand-alone retirement
policy bill.
In preparation for these potential changes, this is a good
time to employ a little spring cleaning in your plan design, take stock of your
employee benefits strategy, and ensure you can check the boxes to both attract
top talent prospects and offer benefits and resources to help your employees
build stronger financial futures.
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