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SECURE Act 2.0: Our top four most anticipated provisions
next issue no. 10: On the horizon
The long-anticipated SECURE Act 2.0 became law on 29 December 2022, although implementation of many of the Act’s provisions will take some years as yet. In anticipation of the new Act, we have been watching its development through Congress, and below we examine our top provisions and the impact we look forward to them having.
1. Auto-enrollment and auto-escalation
One of the most significant provisions in the new SECURE Act is the mandate for autoenrollment for most newly established retirement plans beginning after 2024. The new provisions provide that newly eligible employees are automatically enrolled at a contribution level between 3% and 10% of pay. There is also an automatic provision to lift employee contributions by 1% per year until they reach the level of at least 10% of pay being contributed, with a limit at 15%. Existing plans are exempt from this provision.
While employees can opt out of the auto-enrollment and escalation, we believe that having these options turned on by default will help get more employees into retirement plans.
Certain employers are exempt, such as those with fewer than 10 employees, those that have been in business less than three years, and government and church employers.
We have long advocated for autoenrollment to ensure that employees are contributing early and consistently to their retirement plans. Autoenrollment is a great way to ensure that employees are signed up for retirement benefits and gaining the benefit of eligible company matching.
2. Student loans can be matched
One of the other more significant provisions relating to employer contributions is that, starting in 2024, employers can match employee student loan repayments, as though they were contributions made to retirement accounts.
This is an important provision for early in a career, when a significant number of employees cite their inability to balance loan repayments, high costs of living and relatively lower earnings at that stage in their career as main reasons as to why they are not contributing to retirement accounts. More broadly, the Act allows for an employee to designate their company matching to be assigned to a ROTH account, giving employees more flexibility in the tax treatment of their employer contributions. This is, however, optional for employers to allow. These after-tax Roth contributions, if left in a retirement plan for five years, are distributed tax free.
Allowing employers to treat loan repayments as though they were retirement account contributions, and gaining company matching against those should help get more employees into their retirement accounts at an earlier age, which can have major benefits at later stages in the career due to the compounding effects of early savings.
One of the more curious by-products of the first SECURE Act left 403(b) plans unable to participate in pooled employer plans (PEPs), which have become a staple in the 401(k) space thanks to their ability to tie together multiple smaller employers. Multiple employer plans (MEPs) were allowed for 403(b) plans, and we have seen significant growth in this space, but the provision that requires the employers in a MEP to have a common nexus is one that has held back growth. SECURE 2.0 allows PEPs in the non-profit space, which do not have such a provision for a nexus point, and as such we see significant demand for growth in this space across the 403(b) market.
This will make the 403(b) market start to look more like the 401(k) market, with PEPs being a market for growth to tie together smaller employers that have not historically had that nexus point. But we also see certain lessons that the 401(k) market could learn from their non-profit counterparts.
MEPs have been a significant driver of embracing lifetime income in their solutions. Part of this is related to how MEPs are ultimately sold to their members. An association that is set up as the nexus is selling the MEP solution to the individual schools, hospitals, etc. within the plan. The association therefore has to find something of value to bring to the members to make the MEPs offer something that they should consider. Bringing together the other parties to lower costs and reduce complexity is one area, but the inclusion of lifetime income can be a major product differentiator for the MEP provider, and we have seen them using this as a way to drive inclusion in the plan.
We think that PEPs may soon start to take notice and see the inclusion of lifetime income solutions within their plans as a method of differentiation and a way to drive inclusion. There is also great potential for 401(k) plans to embrace certain aspects of MEPs as well, as characteristics of MEPs that help promote guaranteed lifetime income could see more uptake in PEP plans.
4. Changes to emergency savings, hardship withdrawals and sidecar accounts
There are two key provisions related to emergency savings vehicles and hardship withdrawals contained within the new Act. The U.S. is one of the few countries that allows those saving for retirement to withdraw assets early in cases of financial hardship. This is something of a double-edged sword. In times of economic stress, such as the current inflationary environment, it can be useful to give employees the flexibility to access their retirement savings to help them avoid undue financial hardship. However, the risk is that assets are not replaced in time or sufficiently, so the long-term benefits of continued savings and compounding are lost, ultimately leaving the employee in a worse position when they reach retirement age.
The provisions in the new Act are designed to help allow for emergency access but in a relatively limited way. This provision does not put particular emphasis on the plan sponsor to verify that the amount being withdrawn is actually being used for an emergency, or that the amount withdrawn equals the expenditure incurred by the emergency, potentially leaving it somewhat vulnerable to abuse, but the dollar amounts should be small enough to prevent major ramifications to retirement savings.
The hardship withdrawal provisions have also been broadened to allow participants to self-testify that the amount being withdrawn is for specific hardship needs, such as those incurred by a natural disaster. The provisions also align 401(k) and 403(b) hardship withdrawal rules.
"Sidecar accounts" are another development that should help to alleviate some financial stress on employees and prevent them from dipping into retirement funds prematurely. The Act permits plan sponsors to offer short-term emergency savings accounts as part of a defined contribution plan that must be funded post-tax with Roth contributions and are capped at $2,500. Employees must be able to make withdrawals from these accounts at regular intervals and they do not require repayment. These accounts have particularly broad rules on what constitutes eligible withdrawals.
We hope that educating participants on the value of remaining fully invested within retirement accounts would hopefully help prevent early withdrawals that could negatively impact ultimate retirement savings. General support of emergency savings is wise; whether it’s based on education and informing individuals how to create out-of-plan emergency savings, or tools to help free up funds, those can all contribute to financial resiliency for emergencies. We do appreciate though that in particular times of financial hardship the pool of capital that is built up within a retirement vehicle is a tempting resource to help alleviate particular stresses. Balance needs to be sought while ensuring longevity of investments and continued contributions, so as to not jeopardize retirement savings but allow for flexibility.
Other significant provisions
- 529 rollovers: One additional provision that is of interest allows for unused funds in 529 plans (an account specifically for qualified educational expenses) to be rolled over into a Roth IRA. It is perfectly possible for there to be leftover funds in a 529, if a child gets a scholarship or college is cheaper than expected, and this provision allows the funds to be transferred into a Roth IRA in the same name as the beneficiary of the 529 plan. There are some limitations, including that the limit is $35,000 in the beneficiary’s lifetime, the account must have been open for at least 15 years, and that it is still subject to regular Roth contribution limits, among other limitations. However, we believe that this may help encourage 529 plan pickup, knowing there is more flexibility with any leftover funds.
- RMDs: The continued increase in the RMD age was again a feature in SECURE 2.0. As workers keep retiring later and living longer, we see the increase in RMD age as a benefit for those who can keep saving later in life. We view provisions that allow investors to keep their assets within retirement plans as long as they would wish as generally positive, and see the elimination of RMDs from Roth accounts as a further positive.
- Catchup limits: The increase in catchup contributions for employees aged 60-63 is again a positive, allowing those who can afford it to continue contributing increased amounts in the later years of their working life. The Act also requires (from 1 Jan 2024) that catch-up contributions made by participants over the age of 50 go into a ROTH account. This will add an additional burden on plan sponsors to begin offering ROTH accounts if they currently do not do so.
- CITs in 403(b): While progress was forecast to be made with the passage of SECURE 2.0 in allowing CITs to be included in 403(b) plans, the provisions to correct the parts of regulation were not included in the final Act. It appears that CITs are still not allowed to be a part of 403(b) plans, despite industry enthusiasm. We hope that the regulation is eventually amended, allowing for equal treatment of CITs in 403(b) plans, as they continue to be a popular and low-cost investment option in 401(k) plans.
Why this matters
We believe that it is crucial for plan sponsors and employers to have a deep understanding of the continually shifting regulatory and legislative environment around retirement planning. While some of the provisions of SECURE 2.0 are enacted immediately, the effective dates vary and go out several years, allowing for proper planning to take place. Being able to answer the questions an employee has about their retirement savings, how much they can contribute and on what basis, and what investment options are available and why are areas that have been proven to be very important for employees. Retirement benefits are increasingly viewed as an integral component of an organization’s total benefits package or an employee financial wellness strategy. As employers commence their annual plan reviews, they can work with service providers to understand how they can help implement best practices related to student loan repayments, participant communications and engagement plans, financial wellness tool upgrades and investment vehicle availability.
In this issue
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