Three key provisions of the SECURE Act could help chip away at the nation’s retirement deficit, particularly for younger workers and those working for small employers, according to a new analysis by EBRI.
Using its Retirement Security Projection Model, which reflects the real-world behavior of 27 million 401(k) participants and 20 million individuals with IRAs, EBRI evaluates the impact of the SECURE Act’s provisions to:
- widen access to multiple employer plans (MEPs);
- increase the auto-escalation cap for plans that automatically enroll workers; and
- require coverage of long-term part-time employees.
Overall, when all three provisions are included with baseline assumptions on open MEP take-up rates and participation rates, the retirement savings shortfall would have an overall decrease of 3%, according to EBRI’s brief, “Impact of the SECURE Act on Retirement Income Adequacy.” Based on an overall retirement savings shortfall of $3.83 trillion, this translates to a reduction of $115 billion for households currently ages 35 to 64.
EBRI analyzes the impact of these provisions, by themselves and in combination with others, to provide a quantitative estimate on the impact on retirement income adequacy, which is measured by changes in the average simulated retirement savings deficits and surpluses.
The analysis finds that the percent reductions in retirement savings deficits aggregated across all age groups would be greater for employees working for smaller employers: 5.6% for employers with less than 100 employees and 5.2% for those with 100 to 500 employees.
Workers between 35 and 39 will have more time to benefit from these new provisions, so their retirement savings deficit reductions are significantly greater. According to EBRI, deficit reductions for this age cohort are projected at 5.3% for all employer sizes combined, 10.7% for those with less than 100 employees and 8.6% for those with 100-500 employees.
Open MEP Impact
EBRI notes that 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, its analysis incorporates a wide array of assumed take-up rates. As such, it’s worth emphasizing that the projections could vary considerably from actual outcomes.
For example, if all the open MEPs are assumed to adopt an automatic enrollment plan, the overall retirement savings shortfalls reduction is 3.3%, or $126 billion. If, however, they are assumed to adopt a voluntary enrollment plan, the overall retirement savings shortfalls reduction is slightly less—2.8%, or $107 billion.
Additionally, if all small employers without a retirement plan are assumed to adopt an open MEP, the overall retirement savings shortfalls reduction (with the baseline participation assumption) increases to 5.6% ($214 billion). If two-thirds of those employers adopt an open MEP, the overall retirement savings shortfalls reduction is 4.4% ($169 billion). At the opposite end of the spectrum under a “worst-case scenario,” if only 7.3% of them adopt an open MEP, the overall retirement savings shortfall reduction drops to 2% ($77 billion).
Auto-Escalation Cap
When factoring in the increase in the safe-harbor cap on automatic contribution escalations from 10% to 15% of pay, the retirement savings deficit is estimated to be reduced by 2.6% overall and by 4.5% for those ages 35-39. EBRI further estimates the decrease to be 4.5% for employees working for employers with fewer than 100 employees and 5.1% for employees working for employers with 100 to 500 employees.
Long-Term Part-Time Employees
Taking into account the provision that requires coverage of long-term part-time employees, the retirement savings deficit is projected to be reduced by 3% overall and 5.3% for those ages 35-39.
Retirement Savings Surplus
“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,” explains Jack VanDerhei, EBRI’s Director of Research and author of the report. “Therefore, we also look at retirement savings surplus to better understand the full impact of the new legislation.”
To that end, EBRI finds overall that when all three SECURE provisions are included with baseline assumptions on open MEP take-up rates and participation rates, the retirement savings surplus would have an overall increase of nearly 6%.
As expected, the percent increases in retirement savings surplus across all age cohorts would be larger for employees working for smaller employers: 8.9% for employers with fewer than 100 employees and 7.8% for those with between 100 and 500 employees.
Additionally, the youngest cohort will see their retirement savings surplus increase by 14.4% for all employer sizes combined, 20.5% for those with fewer than 100 employees and 16.3% for those with 100-500 employees.
Taking the analysis one step further, EBRI notes that adding a program to reduce leakage in the system would “boost the deficit reductions considerably.” Overall, the organization finds that when auto portability is added to the three SECURE provisions with baseline assumptions on open MEP take-up rates and participation rates, the retirement savings shortfall would have an overall decrease of 10%, or $383 billion.
