The New Finance Of Longevity

Key Provisions of SECURE Act Projected to Reduce Retirement Deficit by More Than $100 Billion

 Good news for workers currently aged 35-39

New research from the Employee benefit Research Institute (EBRI). Visit EBRI/issuebrief for the complete survey

A new EBRI study finds that key provisions of the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act) could reduce the U.S. retirement deficit by 3 percent or $115 billion for households between ages 35 and 64. For workers currently ages 35–39, the percentage reduction increases to 5.3 percent and further increases to 10.7 percent if they work for small employers (fewer than 100 employees).

The Issue Brief, “Impact of the SECURE Act on Retirement Income Adequacy,” uses EBRI’s Retirement Security Projection Model® (RSPM) to evaluate the impact of provisions in the SECURE Act on retirement income adequacy on a national basis, including greater access by allowing providers to offer multiple employee plans (MEPs), raising the cap under which plan sponsors can automatically enroll workers in “safe harbor” 401(k) plans from 10 percent to 15 percent of wages, and required coverage of long-term part-time employees.

“It is important to note that any analysis focusing exclusively on retirement savings deficits is limited to households who are expected to run short of money in retirement. Therefore, we also look at retirement savings surplus to better understand the full impact of the new legislation,” said Jack VanDerhei, Director of Research, EBRI, and author of the report.

EBRI plans to publish at least two additional Issue Briefs on the impact of the SECURE act. The next one will look at the impact of these provisions on assets under management for the next 10 years under a series of sensitivity analyses. A third Issue Brief will be published on the likely take-up of in-plan annuity options by employers and employees.

How Much More Secure Does the SECURE Act Make American Workers?

This Issue Brief uses EBRI’s Retirement Security Projection Model® (RSPM) to simulate the likely impact on retirement income adequacy of three of the Setting Every Community Up for Retirement Enhancement Act of 2019’s (SECURE Act’s) most important provisions:

  • Widening access to multiple employer plans (MEPs) through open MEPs.
  • Increasing the cap under which plan sponsors can automatically enroll workers in “safe harbor” retirement plans, from 10 percent of wages to 15 percent.
  • Covering long-term part-time employees.

The impact was measured with three different output metrics:

  • Retirement savings shortfalls give the present value of the simulated retirement deficits at retirement age (in 2019 dollars).
  • Retirement savings surpluses give the present value of simulated retirement surpluses at retirement age (in 2019 dollars).
  • Net retirement savings surpluses give the present value of simulated retirement surpluses less retirement deficits at retirement age (in 2019 dollars).
  • Given the lack of information currently available on likely take-up rates for open MEPs by small employers that do not currently offer a retirement plan, sensitivity analysis was performed utilizing a wide array of assumed take-up rates:
  • 7.3 percent.
  • Baseline: 30–31 percent (depending on plan size).
  • 66 percent.
  • 100 percent.
  • In addition, the actual plan type of the open MEP was simulated three different ways:
  • Automatic enrollment (assuming a 90 percent participation rate).
  • Voluntary enrollment (assuming a 60 percent participation rate).
  • Baseline: A blended rate (assuming a 75 percent participation rate).

Together, the baseline adoption and non-participation scenarios form the baseline case scenario.

Overall Reductions in Retirement Savings Shortfalls From Open MEPs: Total Impact Aggregated Across All Age Cohorts

  • With adoption of open MEPs at approximately one-third and a non-participation rate of zero (everyone who is eligible chooses to participate), there is an overall 1.8 percent reduction in retirement savings deficit. One would assume that younger age cohorts would experience a larger impact from open MEPs given the longer time for which they may potentially benefit from the increased coverage. Indeed, this is what we find. Overall there is a 3.2 percent reduction in retirement deficit for those ages 35–39.
  • In the baseline case scenario there is approximately a one-third adoption rate and 25 percent non-participation: The reduction in retirement savings deficit is now 1.4 percent overall and 2.4 percent for those ages 35–39.
    Impact of the Increased Cap on Contribution Escalation on the Baseline Case Scenario

The SECURE Act contains a provision that increases the cap on automatic contribution escalation within the 401(k) non-discrimination testing safe harbor from 10 to 15 percent of pay. Also taking into account the increased cap, the overall reduction in retirement savings deficit is 2.6 percent and 4.5 percent for those ages 35–39.

Impact of Coverage of Long-Term Part-Time Employees on the Baseline Case Scenario

The SECURE Act also contains a provision that requires coverage of long-term part-time employees. Also taking this into account, the reduction in retirement savings deficit is 3.0 percent overall and 5.3 percent for those ages 35–39.

It is important to note that any analysis focusing exclusively on retirement savings deficits is limited to households who are expected to run short of money in retirement. Therefore, we also look at retirement savings surplus to better understand the full impact of the new legislation...

Impact of Changes in Opt-Out Rates on Overall Reduction in Retirement Deficit

If we assume that all open MEPs under SECURE are designed with automatic enrollment, an automatic contribution escalation cap of 15 percent, coverage of long-term part-time employees, and an opt-out rate of 10 percent (typical of automatic enrollment plans):

  • The reduction in retirement savings deficit is 3.3 percent overall and 5.8 percent for those ages 35–39.
  • The increase in retirement savings surplus is 6.1 percent overall and 15.3 percent for those ages 35–39.
  • The increase in net retirement savings surplus is 6.9 percent overall and 18.6 percent for those ages 35–39.

If the non-participation rate is 25 percent:

  • The reduction in retirement savings deficit is 3.0 percent overall and 5.3 percent for those ages 35–39.
  • The increase in retirement savings surplus is 5.9 percent overall and 14.4 percent for those ages 35–39.
  • The increase in net retirement savings surplus is 6.6 percent overall and 17.5 percent for those ages 35–39.

If the non-participation rate is 40 percent (which is commensurate with voluntary enrollment plans):

  • The reduction in retirement savings deficit is 2.8 percent overall and 4.9 percent for those ages 35–39.
  • The increase in retirement savings surplus is 5.6 percent overall and 13.9 percent for those ages 35–39.
  • The increase in net retirement savings surplus is 6.3 percent overall and 16.8 percent for those ages 35–39.

The Impact of Various Adoption Rates on Overall Reduction in Retirement Deficit

If we go back to the scenario above, where open MEPs are available, the cap on the automatic escalation of contributions in the 401(k) testing safe harbor is 15 percent, long-term part-time employees are covered, and non-participation rates are 25 percent of eligible employees, we can now test the impact of different adoption rates.

In a more aggressive adoption scenario, we assume adoption of open MEPs is 66 percent.

  • The reduction in retirement savings deficit is 4.4 percent overall and 7.5 percent for those ages 35–39.
  • The increase in retirement savings surplus is 7.2 percent overall and 17.3 percent for those ages 35–39.
  • The increase in net retirement savings surplus is 8.2 percent overall and 21.2 percent for those ages 35–39.

In our most aggressive scenario, we assume all employers with fewer than 500 employees that do not currently sponsor a retirement plan adopt an open MEP.

  • The reduction in retirement savings deficit is now 5.6 percent overall and 9.2 percent for those ages 35–39.
  • The increase in retirement savings surplus is 8.7 percent overall and 20.2 percent for those ages 35–39.
  • The increase in net retirement savings surplus is 9.9 percent overall and 24.8 percent for those ages 35–39.

Conversely, a “worst-case scenario” would assume 7 percent adoption of open MEPs.

  • The reduction in retirement savings deficit is 2.0 percent overall and 3.5 percent for those ages 35–39.
  • The increase in retirement savings surplus is 4.9 percent overall and 12.3 percent for those ages 35–39.
  • The increase in net retirement savings surplus is 5.4 percent overall and 14.8 percent for those ages 35–39.

The Impact of Auto Portability on Overall Reduction in Retirement Deficit

Of course, lack of coverage is not the only consideration in determining how well workers will fare in America’s retirement savings system. Studies have found that plan leakage through cashouts upon termination is another key variable in determining retirement savings outcomes, especially among workers with low plan balances. Auto portability seeks to address retirement plan cashouts by having terminated participants’ former employer accounts automatically combine with their active accounts in new employers’ plans. Where open MEPs are available, the cap on the automatic escalation of contributions in the 401(k) testing safe harbor is 15 percent, long-term part-time employees are covered, and non-participation rates are 25 percent of eligible employees; further assuming that, upon termination, participants would have auto portability, the overall reduction in retirement savings shortfalls is 10.0 percent.